Why Should You Complete A 401K Rollover?

There are multiple benefits to saving via a 401K plan. First, you get tax deferral with a regular 401K plan. The amount contributed to your 401K reduces your current year federal and state taxes. Second, contributing to a 401K plan gets you in the habit of paying yourself first. Lastly, many companies provide a company match for a certain percentage that you contribute that is essentially free money to the employee.

One downside to 401K plans is that when you leave one job and start a new one, you have to sign up for your new company’s 401K plan. This can lead to a scattering of accounts at different financial institutions and confusion as to how much you have saved for retirement.

The primary solution for this problem is to perform a 401K rollover. While there are multiple options for a 401K rollover, often the easiest and most convenient option is to complete a 401K rollover into your current employer’s 401K plan.

The first step in the 401K conversion process is to evaluate your current company’s 401K plan against your previous 401K plan. If the plan options are comparable in investment options, investment returns, and expenses, then there is no downside to completing the 401K rollover to your new plan.

When considering a 401K rollover, the one thing you do not want to do is to take a lump sum distribution. A lump sum distribution comes with serious tax consequences. First, the 401K company will withhold 20% of your balance for withholding tax to give to the IRA. Secondly, if you are under 59 1/2 you will owe a 10% ealry distribution penalty when you file your taxes for next year.

The last step in the 401K conversion process is to file the paperwork. Check with your current company’s 401K plan to see what the process is. Typically the conversion is started by filling out a 401K rollover form with your current 401K plan. You will need to provide the financial company where your previous 401K funds are held and how you want the rollover contributions invested when the money arrives in your current plan.