What Should I Do With My 401(k) When I Retire?Your 401(k) Rollover Options, Side By Side.
Leave it, roll it to an IRA, or turn part of it into income. Maartin lays out the IRS rules and the insurance and annuity options, so you choose with every trade-off in view.
The Short Answer
When you leave a job, you can usually leave your 401(k) in the plan, roll it to an IRA or a new employer’s plan, or cash it out. A direct rollover moves the money with no tax withheld. A check paid to you has 20% withheld, and you have 60 days to finish the rollover.
Source: IRS.gov
Three Rules Worth Knowing
- 60 Days
- Your deadline to deposit a distribution paid to you into an IRA or another plan and keep it a rollover.
- 20%
- Federal tax withheld from a 401(k) distribution paid to you, even if you plan to roll it over.
- 55
- Leave your job during or after the year you turn 55, and that plan’s withdrawals skip the IRS’s 10% early tax.
Two Main Choices
Leave It In The Plan Or Roll It To An IRA?
The IRS treats each choice differently. Here is how they compare on the rules that matter most at retirement.
| Question | Leave It In Your 401(k)Your Former Employer’s Plan | Roll It To An IRAAn Account In Your Own Name |
|---|---|---|
| Tax On The Move | None. The money stays where it is. | None with a direct rollover. Tax generally waits until you withdraw from the IRA. |
| Leaving Work At 55 Or Later | Withdrawals from this plan skip the 10% early tax if you left during or after the year you turned 55. | The age-55 exception stays with the plan. IRA withdrawals before 59½ generally owe the 10% tax. |
| Required Withdrawals | Generally start at 73. If the plan allows, you can wait until you retire from that employer. | Generally start at 73, whether or not you are still working. |
| Taking Money Out | The plan’s own rules decide when and how you can withdraw. | You decide, subject to taxes and the terms of what the IRA holds. |
| Moving It Again Later | A direct rollover to an IRA or a new plan is available when you are ready. | One IRA-to-IRA rollover per 12 months. Direct transfers between IRAs have no such limit. |
| Income For Life | Only if the plan offers an income or annuity option. | The IRA can hold an annuity that pays you, or you and a spouse, for life. |
Investment choices inside either account belong with a registered investment professional; Maartin covers the insurance and annuity side.
How The Money Moves
Your Choices, In The IRS’s Terms.
The way the money travels decides whether tax is withheld and which limits apply.
Direct Rollover
Your plan sends the money straight to the IRA or new plan, sometimes as a check made out to the new account. No tax is withheld.
Trustee-To-Trustee Transfer
One IRA custodian sends money directly to another. No tax is withheld, and the once-a-year rollover limit does not apply.
60-Day Rollover
The plan pays you and withholds 20%. To roll over the full amount, you replace that 20% from other money within 60 days, or the shortfall becomes taxable.
Income From An IRA Annuity
An IRA already defers taxes, so the reasons to place part of it in an annuity are lifetime income and the contract’s guarantees, backed by the insurer’s claims-paying ability.
Working With Maartin
A Rollover Review, Start To Finish.
- 01
Gather The Plan Papers
Your latest 401(k) statement and the plan’s rollover notice. The plan must explain your rollover options in writing.
- 02
Decide What The Money Must Do
Income now, income later, or a reserve for your heirs. That answer narrows the choices. See retirement income planning.
- 03
Compare Staying And Moving
Maartin lays out the rules for each, including the age-55 exception you would give up by leaving the plan.
- 04
Look At Income Options
If part of the money should pay you for life, Maartin compares annuity contracts, surrender charges included.
- 05
Move It Directly
If you roll over, a direct rollover keeps the 20% withholding out of the picture.
Taxes on any rollover are your CPA’s call, and Maartin works alongside them.
Before Your Review
What To Bring To A Rollover Review.
These papers answer most of the questions the IRS rules raise.
- Your most recent 401(k) or 403(b) statement
- The plan’s rollover notice or distribution paperwork
- The date you left, or plan to leave, the employer
- Statements for any IRAs or annuities you already own
- Your last tax return, for your CPA’s review
- Your Social Security statement, so the income plan fits together
Questions
Common Questions
Do I have to roll over my 401(k) when I retire?
Usually you can leave it in the plan. If your balance is between $1,000 and $5,000 and you make no choice, the plan may move it to an IRA in your name. A balance of $1,000 or less may be paid to you with 20% withheld, and you can still roll it over within 60 days.
What is the 60-day rollover rule?
If a distribution is paid to you, you have 60 days from the day you receive it to deposit it in an IRA or another plan. Miss the deadline and it becomes taxable, plus the 10% early tax if you are under 59½ and no exception applies.
Can I roll my 401(k) into an annuity?
Yes. An IRA can hold an annuity that pays you, or you and a spouse, for life. Deferred annuities carry surrender charges in their early years, and their guarantees depend on the issuing insurer’s claims-paying ability. Maartin compares contracts before any money moves.
How many times can I roll over an IRA?
One IRA-to-IRA rollover in any 12-month period, counting all your IRAs together. Direct trustee-to-trustee transfers and rollovers from a 401(k) to an IRA fall outside that limit.
When do I have to start taking money out?
Generally at 73. A 401(k) may let you wait until you retire if you still work for that employer, while an IRA starts at 73 regardless. Our guide to required minimum distributions covers the dates.
Does Maartin manage the money after a rollover?
Maartin is a licensed California insurance agent, and he discusses rollovers as insurance and annuity planning: income options, annuity contracts and the IRS rules that govern the move. Your CPA handles the taxes, and Maartin works alongside them.
Leaving Your Job?
Move Your 401(k)
With A Plan.
Bring your plan statement and rollover notice, and see each option and its rules side by side.
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