For the most part, rolling over a 401-k is a pretty easy thing to do. Finance companies that offer retirement savings products like to make it a no-fuss thing to do because they want to earn and keep your business. Still, if you aren’t familiar with the process, it could get a little confusing. Is this your first time transferring a 401-k balance, there are a couple of ways that you can do it, and certainly a few ways in which you could wind up paying a hefty sum in taxes, so it’s best to be very careful with what you’re doing. With that in mind, let’s take a look at what you need to do to if you find yourself in the position of having to transfer your 401-k into a variety of alternative retirement savings vehicles.
First off, keep in mind that retirement savings accounts come in essentially two types. There are accounts that have you pay the taxes up front, and there are accounts in which you pay the taxes when you withdraw the funds. Both have benefits, and both have drawbacks, depending on your situation.
Tax-deferred retirement savings accounts are right now the most popular way to go when it comes to saving up a nest egg. The federal government doesn’t tax the funds you place in the account until such time as you withdraw them. Pretty cool, huh? Well, yes and no. Looking strictly at rolling over the tax-deferred 401-k into another tax-deferred account, such as a traditional IRA means little more than you having to contact the company who brokers your account and letting them know that you’re switching for some reason. They’ll ask you to what company you’ll be transferring your funds, probably offer you some sort of IRA product that their company offers, and then cut a check for the funds in your account, and you’ll never see it. The money in this case goes from brokerage to brokerage, so that you won’t try to cash the check. Sure, it’s your cash, but the minute you sign that check and pass it to the bank teller, it becomes income, and is subject to taxes and fees.
Yes, you did read that right- there are fees associated with cashing out your retirement account, simply because the government wants you to keep it where it’s at, rather than buying a new car with it.
The other option, of course, is transferring your 401-k to a retirement account like a Roth IRA. You may think it’s a great idea to always avoid taxes for as long as possible, but that may not always be the case. The beauty of paying your taxes sooner rather than later is that you may be able to pay less in taxes when the time comes for you to retire.
You might be tempted to go ahead and draw out your 401-k at this point, though. Many people do. Whether it’s to pay off credit cards or student loans, or even to put a new roof on your home, it can be incredibly tempting to think that you can save money by avoiding taking out an extra loan. Sometimes, that’s true. If you have an underperforming 401-k and something like a major medical bill to pay, you may be able to pull the funds and avoid paying an excessive interest rate. That is not generally the case, however. For the most part, it’s always best to simply leave the funds right where they are, and just let the market do its thing.
