Rolling over your retirement plan assets when you leave a job gives your savings the potential for continued growth. Learn about the benefits of rollover IRAs, and about other options for your retirement plan money.
Leaving a job or retiring is a big change in your life. A rollover IRA gives your money the potential to keep growing. Of course, a rollover IRA is not the only option you have. You should carefully compare all your options to make the best choice for your situation.
Moving your retirement plan assets into a rollover IRA not only helps you keep the same tax benefits, it also offers a number of other advantages.
What are some of the benefits of rolling into an IRA?
You keep the same tax benefits.
A traditional IRA gives your money the potential to keep growing tax-deferred. A Roth IRA — like a Roth account in a 401(k) or 403(b) — can provide tax-free growth potential and tax-free withdrawals .
You avoid paying taxes and penalties.
By not cashing out, you won’t have to pay taxes or withdrawal penalties.
A few things to keep in mind
You can avoid mandatory income tax withholding with a direct rollover.
Make sure the rollover funds don’t come to you. The money should go directly from your old plan’s trustee to your rollover IRA’s trustee or custodian.
If you choose an indirect rollover, income taxes will be withheld.
You can still initiate a rollover if you request a cash distribution. However, 20% of the taxable portion of your distribution is withheld from your distribution for income taxes.
You must then roll over the money into an IRA within 60 days of receiving your distribution if you want to keep the tax benefits.
If you replace the amount withheld, you can roll over your entire account value. (Your withholding amount will be refunded by the IRS when you file your taxes.)
Know what is taxable and what is not.
When you make withdrawals from traditional IRAs, the money is taxable. With Roth IRAs, you already paid taxes on money going in, but qualified withdrawals, including earnings, aren’t taxable.
Money in a Roth 401(k) or 403(b) account can be rolled into a Roth IRA. Non-Roth accounts can be rolled into a traditional IRA or Roth IRA. Rollovers to Roth IRAs from non-Roth accounts are taxable.
Moving your money from an old plan into your new employer’s plan may be an option to consider. Be sure to review a new employer’s policy on rollovers from other plans.
Benefits of rolling into a new plan
Rolling your money into a new employer’s plan gives your retirement assets the opportunity to continue growing tax-deferred. It’s also convenient to have your assets combined into one account.
Your new plan may provide additional benefits, such as:
Automatic investing. If your new plan allows employee deferrals, you can take advantage of payroll deductions to regularly contribute to your retirement account. You may be able to contribute up to $23,000 for 2024.
Extra contributions. If you’re age 50 or older and your plan allows employee deferrals, the plan may also allow you to contribute even more — up to an additional $7,500 for 2024.
A few things to keep in mind
You may not be able to roll your money into your new plan right away.
Some employers may require a waiting period before you can roll your money into the plan.
If you’re undecided about what to do with your retirement plan account when you leave your job, keeping it where it is may be a temporary solution. Check with your employer to review how your plan works.
Benefits of staying in your current plan
You will maintain your tax benefits.
As long as you keep your assets in the plan, your account can continue to grow tax-deferred. Roth accounts provide the potential for tax-free distributions.
You will avoid taxes and penalties.
By not cashing out, you won’t have to pay taxes or early withdrawal penalties.
You keep your money invested.
If you’re satisfied with your plan’s provider, you can keep your assets in the same investments.
A few things to keep in mind
Most financial experts advise against cashing out. However, withdrawing your plan balance does give you money to take care of current needs.
A few things to keep in mind
You may have to pay federal taxes.
Before you receive your payout, your employer must withhold 20% of the taxable portion of your distribution for federal income taxes. Depending on your income tax rate, you may owe even more on the taxable amount.
Qualified withdrawals from Roth accounts, including earnings, are tax-free. Only the earnings portion of nonqualified withdrawals from Roth accounts is taxable.
Withdrawals from Roth accounts are tax-free if the account was established at least 5 years before, and if you’re at least 59½ years of age or if withdrawals are made because of disability or death. Withdrawals from your non-Roth balance are generally taxable.
You could be subject to penalties.
If you’re under age 59½ when you cash out, you may have to pay a 10% early withdrawal penalty on the taxable portion of your distribution. If you’re 55 or older when you leave your job, withdrawals are penalty-free but still taxable. (Other exceptions may also apply.)
You may be hit with additional taxes.
You may owe state and local taxes on the taxable portion of your distribution.
You can reduce what you owe.
Instead of taking your entire account balance in cash, consider taking a distribution for just what you need. That way, you avoid paying applicable taxes and penalties on the rest of your account.
The remaining amount can keep growing tax-deferred if you leave it in the plan or roll it into an IRA or another plan. Roth accounts can be rolled only into Roth IRAs or into plans that accept Roth rollovers.
Check with your tax advisor or financial professional about the specific rules for lump-sum withdrawals.
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