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On the surface, 401(k) plan rollovers seem simple enough. After all, you are essentially just moving your current retirement savings to another tax-deferring account. But, between choosing a rollover option and remembering the specific requirements, many of us view 401(k) plan rollovers as a daunting and overwhelming process. There are advantages and disadvantages to every consideration, so familiarizing yourself with your options is essential to finding the best fit for you and helping make the process a little less complicated.

Valley Credit Union is not a tax professional and is not offering tax advice. For tax-related decisions, always consult a tax professional or visit irs.gov.

Traditional IRA

A traditional IRA is a tax-deferred retirement account that allows you to directly manage your savings.

Advantages:

• Account ownership not associated with your company
  • You don’t have to worry about transferring funds when you switch jobs or retire
• Can consolidate multiple accounts into a single retirement account
• May offer more investment options than your past/potential 401(k) options
• May offer more services and guidance on investing choices

Disadvantages:

• Limits your ability to rollover savings back into a 401(k) in the future
• Required minimum distributions (RMDs) apply at age 72 regardless of circumstances
• Could be subject to a 10% early withdrawal penalty
• Must specify how you want your funds invested or they will not be invested
• Assets only protected from creditors for bankruptcy
• There is a “one rollover per year” rule

Roth IRA

A roth IRA account is similar to a traditional IRA, but instead of paying taxes when you withdraw, you pay taxes immediately upon account conversion.

Advantages:

• Withdrawals are tax-free in retirement
  • Granted if you’re over 59 ½ and have held the account for over 5 years
• All additional earnings from investment will be tax-free
• There are no RMDs
• May offer more investment options, services, and guidance
• Can consolidate accounts into a single retirement account

Disadvantages:

• Must pay taxes on existing savings funds immediately upon conversion
• Could be subject to a 10% early withdrawal penalty on earnings
• Must have your account open for 5 years to withdraw tax-free
• May face higher fees for maintaining your account
• Assets only protected from creditors for bankruptcy
• There is a “one rollover per year” rule

Another 401(k) Account

A new 401(k) plan will be set up similar to your current 401(k) plan, except it will offer different investing choices, services, costs, etc. based on the company plan.

Advantages:

• Earnings will continue to be tax-deferred
• Typically protected from creditors
• Can deposit more annually than with an IRA
• May offer lower fees and more investment options than your past 401(k)
• Can delay RMDs if you continue to work with the company

Disadvantages:

• May have a waiting period to be eligible for employer’s plan
• May have less investing choices or a higher cost than other plans
• Control of your account is in the hands of the company

Cash Out

Typically, you should only cash out your retirement fund as a last resort. You’ll be taxed on the withdrawal and additionally penalized if you are younger than 55. Financial hardship does happen, so if you need to cash out, withdraw only what you need and put the rest in a retirement fund if possible.

Don’t Forget!

Regardless of the account you choose, here are a few important details to remember to ensure you are optimizing your savings and don’t miss any deadlines.

1. Request that your financial institution does a direct rollover to your new plan. If not, you must complete your rollover within 60 days once you receive your distribution to avoid penalty taxes in addition to an automatic 20% federal tax.
2. Don’t completely rule out your current retirement plan. Depending on fees, company stock investments, and other factors, your current retirement plan may still be the best option for you even if you leave the company, provided that your employer allows you to stay on the plan.
3. Start planning now and keep track of your retirement savings. Don’t neglect your old accounts— even small savings add up!

If you’d like to learn more about rollover options and requirements, visit the IRS Retirement Plan page. As a reminder, Valley Credit Union is not a tax professional. If you have tax or penalty related questions, be sure to consult a tax professional or visit irs.gov for more information. And, if you are interested in an IRA plan, Valley’s Traditional and Roth IRA plans offer competitive dividends and no monthly or annual maintenance fees.