When Could a Rollover IRA Make Sense?

Retirement
A mature woman crochets in her studio: rollover IRA

Let's say you just started a new job. (Congratulations!) Let's also say that, in all your excitement, you completely forget about the 401(k) you had with your previous employer. (It happens to the best of us.)

Chances are you were contributing funds directly to your retirement account from every paycheck — and maybe your company even had a matching contribution program. But when you leave a company, you have several options for how to proceed with your 401(k). This may be the time to consider a rollover individual retirement account (IRA).

Why a Rollover IRA?

While you can leave your old 401(k) where it is, there could be a few drawbacks. You can no longer contribute to the account once you leave your job. Your former company may have higher fees for former employees, and you could also have limited investment options with the plan. If you have $5,000 or less in your old 401(k) account, your former employer can force you out of the plan and into an IRA of their choosing. If you have less than $1,000, the employer can cash you out, which would cause you to pay certain taxes and penalties.

Over time, management could change at your previous company — or the company itself could change ownership — making it hard to keep contact information handy for managing your old account.

401(k) Rollover Opportunities

If you've decided to take your former employer's 401(k) with you, you have a few options. If you're happy with the management at your new company, you may be able to roll the old 401(k) into the new 401(k) — as long as your new employer allows it.

Another choice is to perform a 401(k) rollover to an IRA. This rollover works if you have an existing IRA you want to roll the old 401(k) directly into — or you can open a rollover IRA.

Rolling your old 401(k) directly into an IRA allows you flexibility for managing your money. A rollover from a 401(k) into an IRA is not considered a contribution, so there are no limits on the amount that can be rolled over, and the rollover will not affect the amount you can contribute to the 401(k) that year.

If you choose a traditional IRA, your money will continue to grow tax-deferred, meaning you won't pay taxes on the rollover — though you will pay taxes on distributions when you retire. If you choose a Roth IRA, your rollover amount will be subject to tax, unless you're rolling it over from a Roth 401(k).

401(k)-To-IRA Rollover Rules

However, there are some rules to be aware of to help avoid running into any possible tax implications. When rolling over your account, you might consider the direct transfer method — where you fill out a form with information for both the old account and new account you want the funds rolled into. This way, the money does not leave a managed allowable account.

If the amount comes into your hands because you requested the check be made out to you, it must be rolled over within 60 days, or the transfer will count as "cashing out" and may be subject to tax. There is also a mandatory 20 percent withholding with rollovers, according to the Internal Revenue Service (IRS), which means you would have to come up with the amount withheld to complete the full rollover. When in doubt, speak to a tax professional and the plan manager to learn your specific rollover rules and request any required forms.

And remember, don't worry if you just remembered the 401(k) from your old job — you can initiate a rollover at any time.

IMPORTANT DISCLOSURES
Information provided is general and educational in nature. It is not intended to be, and should not be construed as, legal or tax advice. Western & Southern Financial Group and its member companies (“the Company”) does not provide legal or tax advice. Laws of a specific state or laws relevant to a particular situation may affect the applicability, accuracy, or completeness of this information. Federal and state laws and regulations are complex and are subject to change. The Company makes no warranties with regard to the information or results obtained by its use. The Company disclaims any liability arising out of your use of, or reliance on, the information. Consult an attorney or tax advisor regarding your specific legal or tax situation.

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