How Does a 401(k) Rollover Work?

Changing jobs or retiring can feel overwhelming, especially when you’re unsure what to do with your 401(k). You’ve worked hard to build that retirement savings, and the last thing you want is to lose money to taxes or penalties because you made the wrong decision. A 401(k) rollover might be the approach you need to safeguard your retirement funds while maintaining their tax-advantaged status. Exploring your options lets you make informed and confident choices about your financial future. Harvest Wealth Partners is here to help you explore your options.

What Is a 401(k) Rollover and Why Consider One?

A 401(k) rollover involves moving funds from your employer-sponsored retirement plan to another qualified retirement account, such as an Individual Retirement Account (IRA) or a new employer’s 401(k) plan.

People consider rollovers when they change jobs, retire or want access to better investment options. The primary benefit is maintaining the tax-deferred status of your retirement savings while potentially gaining more control over your investment choices. When you roll over your 401(k), you historically don’t pay taxes on the transferred amount until you withdraw it from the new account.

Types of 401(k) Rollovers: Understanding Your Options

Direct Rollover

With a direct rollover, your plan administrator transfers your 401(k) funds directly to your new retirement account. This is historically the most straightforward option because no taxes are withheld from the transfer amount, and you do not handle the money directly.

Trustee-to-Trustee Transfer

Similar to a direct rollover, this method involves moving funds directly from one financial institution to another. The key difference is that this historically applies when moving funds between IRAs rather than from a 401(k) to an IRA.

60-Day Rollover

In a 60-day rollover, you receive the distribution check directly and have 60 days to deposit it into another qualified retirement account. However, your employer will withhold 20% for taxes, meaning you’ll need to use other funds to roll over the full amount if you want to be better positioned against taxes on the withheld portion.

Important Rules and Guidelines to Follow

The 60-Day Rule

If you choose the 60-day rollover option, you need to deposit the funds into your new retirement account within 60 days of receiving the distribution. Missing this deadline could result in the entire amount being treated as taxable income, plus potential early withdrawal penalties.

One-Rollover-Per-Year Rule

The IRS limits you to one IRA-to-IRA rollover in any 12-month period. However, this rule doesn’t apply to direct rollovers, trustee-to-trustee transfers, or rollovers from 401(k) plans to IRAs.

Tax Withholding Requirements

When you receive a 401(k) distribution directly, your employer must withhold 20% for federal taxes. To mitigate paying taxes on this withheld amount, you’ll need to contribute additional funds from other sources when completing your rollover.

Strategic Considerations for Your Rollover

Tax Implications

Rolling over to an IRA maintains the tax-deferred status of your 401(k) funds. However, if you’re considering a Roth IRA rollover, you’ll pay taxes on the converted amount now but enjoy tax-efficient withdrawals in retirement.

Investment Options

Moving your 401(k) to an IRA often provides access to a broader range of investment options than your employer’s plan. This flexibility can help you create a more personalized investment strategy that addresses your risk tolerance and retirement goals.

Making Your Rollover Decision Work for You

A 401(k) rollover can be a robust way to maintain control over your retirement savings while preserving their tax advantages. However, the right choice depends on your specific financial situation, investment preferences, and long-term goals.

At Harvest Wealth Partners, we understand that retirement planning decisions can feel overwhelming. Our team takes the time to understand your circumstances and help you navigate your rollover options with confidence. If you’re ready to speak to a financial consultant, contact us today.

A plan participant leaving an employer typically has four options (and may engage in a combination of these options): 1. Leave the money in their former employer’s plan, if permitted; 2. Roll over the assets to their new employer’s plan, if one is available and rollovers are permitted; 3. Roll over to an IRA; or 4. Cash out the account value