401K Rollovers: What You Need To Know

401K Rollovers: What You Need To Know

If it is time for you to change jobs or retire, you may be wondering what you can do with the assets in your company-sponsored 401K account. In fact, once you reach the age of 59 ½ you can move money out of your 401K without penalty. There are a few options to consider when it comes to planning what to do with your retirement account. You can leave the funds in the account, withdraw them and pay the necessary taxes, or you can roll these funds into an independent retirement account (IRA). Your team at Guardian Financial Management in Flower Mound, TX, is here today to talk about what it means to roll over your money.

Why You Shouldn’t Leave Your Money in a 401K

Leaving your money in a 401(k) retirement account may not always be the best choice to maximize your investment potential and protect your retirement savings. First, a significant drawback of a 401(k) is the limited range of investment options. You’re restricted to a predefined selection of funds chosen by your plan administrator, which may not align with your goals or risk tolerance. Furthermore, many people are unaware of the hidden fees associated with 401(k) plans. These fees, often not openly disclosed, and can be difficult to find and understand. Lastly, 401(k)s may not provide the level of safety you’d expect. With limited investment choices, your portfolio is vulnerable to fluctuations, whether from stock market volatility or changes in bond prices, putting your retirement at risk during market downturns. 

When Can You Move Your Money Out of Your 401k?

As retirement approaches, knowing when and how to move your 401(k) funds can be a critical step in protecting your savings. Market downturns and recessions often take around five years to recover, which is why we strongly encourage creating a comprehensive retirement plan well before the five-year countdown to retirement. Part of this planning involves understanding your 401(k) options. If you have a 401(k) with a previous employer, you can “rollover” those funds into an IRA, which we highly recommend for greater control and investment flexibility. Additionally, once you reach age 59½, you can take advantage of an “in-service” rollover, allowing you to transfer your current 401(k) balance into an IRA while continuing to contribute to your company plan. This strategy enables you to build a safer, more personalized retirement portfolio that aligns with your goals, setting you on a clearer path toward financial security in retirement.

Know The Rules And Potential Taxes

Understanding the rules and potential tax implications is essential when moving your 401(k) funds. It’s important to “roll” over your 401(k) rather than “withdraw” it. Withdrawing funds triggers taxes on the entire amount in the current tax year, which can significantly reduce your savings. Moreover, accessing retirement funds before age 59½ typically results in a 10% penalty on top of standard income taxes, making early withdrawals a costly choice. It’s best to think of this money as off-limits until retirement to protect it from unnecessary taxes and penalties. However, many exceptions and nuances exist within these rules, so consulting a professional can help ensure you’re making the most tax-efficient decisions for your retirement.

Learn More By Talking To An Advisor!

Retirement planning can be complex, but our team of experienced financial advisors is here to help you. You can schedule a meeting with Guardian Financial Management in Flower Mound, TX, today by calling 972-996-7858 today.