401(k) Rollover and Withdrawal Guidance

Withdrawing money early from your 401(k) generally results in a penalty for most people. Early withdrawals, even “hardship withdrawals” are usually subject to a 10% penalty from the IRS and withdrawals are taxed as ordinary income. Provided you pay back the funds within five years, you may borrow from your 401(k) to fund a first time purchase of a primary residence or to pay for your children’s education. Your individual situation may vary. You should consult a tax adviser if considering early withdrawals. Withdrawal penalties typically end at age 59.5.

Important Considerations for a 401(k) Rollover

Many people consider 401(K) rollovers whenever they retire or leave their employer. Depending on the employer and the requirements of their retirement plans, you may be able to open a new 401(k) with your new employer and have multiple tax-deferred accounts (workers generally can have 401(k)s and IRAs simultaneously at any point).

Traditional IRAs have the same tax treatment as traditional 401(k)s but they are established by individuals and thus not offered through employers. A downside is lower contribution limits (but if your new employer offers a 401(k) program, you may be able to reap the benefits of both). Another potential downside is the increased responsibility some feel about having to manage their own investments or hire a professional manager.

How Does a Rollover Work?

There are two methods for rolling your 401(k) into an IRA if your plan permits it.i Please be sure to check with your 401(k) plan administrator.

Option One: Your 401(k) plan administrator directly transfers the money to another retirement plan or to an IRA.

Option Two: If your 401(k) plan administrator issues your distribution in the form of a check, you will have 60 days to deposit the check into a new retirement account. If you don’t deposit it in your new retirement plan account or IRA within 60 days, the full distribution amount may be subject to ordinary income tax and potentially a 10% early withdrawal penalty if you are under age  59.5.

Importantly, if the check is made payable directly to you, it will be subject to a mandatory 20% withholding, even if you intend to roll it over. However, you may be able to avoid that mandatory withholding by having the check made payable directly to the receiving plan or IRA account.

How Can Fisher Investments Help?

Since starting our Private Client Group in 1995, we have assisted clients with thousands of 401(k) rollovers. Once elected, we help ensure the process is seamless by staffing a team of operational specialists, helping conduct an initial “rollover call” with the financial institution housing the assets, helping clients correctly complete any necessary paperwork and monitoring the asset transfer process from initiation to deposit, all the while answering client operational questions and keeping them up-to-date on the process. In some cases, we may even be able to manage 401(k) accounts for active plan participants. If you determine that electing a rollover is appropriate for you, we may be able to help you rollover 403(b)s, SEP IRAs, Profit Sharing Plans and most defined contribution plans.

 

Nothing herein constitutes legal, tax or investment advice. The foregoing constitutes the general views of Fisher Investments and should not be regarded as personalized advice. Please seek the guidance of a CPA when making tax planning decisions.


 

i Source: Internal Revenue Service, as of 02/11/2021. Rollovers of Retirement Plan and IRA Distributions.
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