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Rolling over. What exactly does that mean?

What exactly is a rollover? A rollover is a transfer of one 401(k) to another retirement account.

  • Intro
  • Rolling over to an IRA
  • Rolling over to new employer’s plan
  • Cashing out

Intro

You are “rolling over” your money without taking any out, so that you can continue to enjoy the benefits of tax-deferred retirement savings.

When you leave a job, there are two main types of 401(k) rollovers you can do:

Rollover to an IRA

You can rollover your 401(k) to an IRA (Individual Retirement Account) at the financial institution of your choice.

This gives you access to many more investment options, including individual stocks, real estate investments and commodities. You’ll have more flexibility to manage your investments over time and maximize your returns. Always make sure you understand the annual fees you will be charged for your Rollover IRA.

Ask your plan provider to do a direct rollover, where they transfer your funds directly into the IRA account. You will need to fill out forms. Otherwise, if they give the money directly to you, they will withhold 20% for taxes. You have 60 days to put that money into an IRA, but you will also have to deposit the 20% that was withheld—a complication that’s best to avoid.

Rollover to your new employer’s 401(k) plan

This can be a good option if your new employer’s plan accepts transfers, and if you are happy with the new plan’s investment choices and the fees are reasonable. Having one 401(k) plan makes it easier to track the performance of your investments over time and to make changes.

Initiate the rollover with your new plan administrator, and have your old administrator send the funds directly to the new plan. You may need to wait a period of time in the new job until you can make the transfer.

Cashing out

Cashing out is taking money out of your savings prematurely. This is a common and potentially devastating mistake that people make at job transitions. Cashing out puts your savings has long-term consequences on your retirement savings and is an irreversible decision.

There is also an immediate price to pay for cashing out, taxes and penalties.

Want to know more about how compound interest works? Watch this video from Khan Academy:

Our goal is to change how we think about saving.

I founded NARPP as a non-profit, because I believe that retirement savings should be about people— and making their lives better. Not about assets under management, sales goals and commissions. The process of saving for retirement has become so complex and confusing it is not surprising that people have a hard time figuring out what’s in their best interest.  It doesn’t need to be this way. At NARPP we are committed to simplifying the complex, delivering fair and transparent investment information, and giving people ownership and control of their retirement savings. Our singular mission is to help you succeed.

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