401(k) Rollover
"If you don’t find a way to make money while you sleep, you will work until you die." Warren Buffett
Do you have a 401(k) from a previous employer? Have you thought about what to do with it? If you’ve recently changed jobs and are unsure about your retirement account, you’re not alone. Many people either forget about or put off deciding about their old 401(k), often leaving behind valuable savings without a plan. In fact, data from Capitalize, a company specializing in retirement rollovers, estimates that U.S. workers have abandoned 29.2 million accounts, holding a staggering $1.65 trillion in assets1. Whether you’ve unintentionally lost track of your 401(k) or deliberately left it untouched, you could be missing out on better investment choices, lower fees, and more control over your retirement funds. In this newsletter, we’ll break down everything you need to know about 401(k) rollovers—what they are, where you can roll over your old account, and the pros and cons of each option.
What is 401(k) rollover?
A 401(k) rollover is the process of transferring your funds from an old 401(k) retirement account to a new retirement account, typically an IRA (Individual Retirement Account) or a new employer's 401(k) plan or Annuity. This can occur when you change jobs or retire, allowing you to consolidate your retirement savings and potentially gain better control over your investments.
Why Consider a 401(k) Rollover?
Rolling over your old 401(k) might be a smart move because of following reasons:
1. More Investment Choices
Most 401(k) plans offer a limited selection of funds, restricting your investment choices. By rolling over your savings into an IRA or annuity, you can unlock a wider range of investment options, giving you greater flexibility and control over your financial future. As John Bogle, the renowned investor and founder of Vanguard, once said, “A diversified portfolio is the key to long-term financial success.” A rollover allows you to build a more diversified portfolio tailored to your goals, risk tolerance, and retirement timeline, helping you maximize growth while managing risk effectively.
2. Lower Fees
401(k) plans often come with administrative fees that can quietly erode your returns over time. While you're actively contributing, your employer typically covers some of these costs. However, once you leave your job, the burden of these fees falls entirely on you. These expenses may be deducted directly from your account balance or indirectly through reduced investment returns, limiting your growth potential. By rolling over to an IRA or annuity, you may have greater control over costs by selecting low-cost investment options. As Robert Kiyosaki wisely said, “It’s not about how much you make, but how much you keep.” The goal is to preserve more of your hard-earned money, minimizing unnecessary fees and maximizing your retirement savings.
3. Simplified Management
If you have multiple old 401(k)s from different jobs, managing them can become confusing. Consolidating them into a single Annuity or IRA or a current 401(k) makes tracking your investments and adjusting your strategy easier.
4. Continued Tax-Deferred Growth
By rolling over, you keep your retirement savings tax-deferred. A direct rollover ensures you won’t pay taxes or penalties, keeping your money working for your future.
401(k) Rollover Options:
If you decide to move your old 401(k), here are your main choices, along with their benefits and drawbacks:
1. Rolling over to IRA
Rolling over an old 401(k) into an IRA is the most common choice for several reasons:
✅ More Investment Options – Unlike a 401(k), an IRA provides access to a broader range of investments, including stocks, bonds, ETFs, mutual funds, and even alternative investments.
✅ Lower Fees – Many IRA options have lower administrative, and management fees compared to employer-sponsored 401(k) plans.
✅ Greater Flexibility – IRAs come without employer-imposed restrictions on withdrawals or investment choices, giving you full control over your retirement funds.
✅ Roth Conversion Potential – With an IRA, you have the option to convert to a Roth IRA, allowing for tax-free withdrawals in retirement if done strategically.
However, rolling over to an IRA also has some potential downsides:
⚠️ Self-Directed Management – Managing an IRA requires individual effort and investment knowledge. With more options available, it can feel overwhelming if you’re unfamiliar with different asset classes.
⚠️ Less Creditor Protection – 401(k) accounts offer stronger protection against creditors in case of bankruptcy or legal issues compared to IRAs.
⚠️ Withdrawal Restrictions – Some 401(k) plans allow penalty-free withdrawals before age 59½ under specific circumstances, while IRAs generally do not offer such exceptions.
Before deciding, it’s crucial to weigh these pros and cons based on your financial goals, risk tolerance, and investment knowledge.
2. Move to a New Employer’s 401(k)
If your new employer offers a 401(k) plan, you may have the option to roll your old 401(k) into it. This strategy offers several benefits:
✅ Creditor Protection – Employer-sponsored 401(k) plans generally offer strong protection against creditors and lawsuits.
✅ Tax-Deferred Growth – Your investments will continue to grow tax-deferred, just as they did in your previous 401(k).
✅ Simplified Management – Consolidating your retirement savings into one account makes it easier to track and manage your investments.
✅ Rule of 55 Advantage – If you leave your job or retire at age 55 or later, you can withdraw from your 401(k) penalty-free—an option not available with an IRA.
However, rolling over to a new employer’s 401(k) also has some potential downsides:
⚠️ Limited Investment Choices – Your new 401(k) plan may offer a different selection of funds, possibly with fewer options than an IRA.
⚠️ Higher Fees – Some employer-sponsored plans have higher administrative and investment fees, which can eat into your returns.
⚠️ Restricted Access – Employers may impose restrictions on withdrawals, loans, or investment changes, limiting your flexibility.
Before transferring your old 401(k) into a new employer’s plan, review the investment options, fees, and withdrawal rules to ensure it aligns with your retirement goals.
3. Roll Over to an Annuity
Annuities are gaining popularity as a retirement strategy, with total annuity sales reaching $432.4 billion in 2024, a 12% increase from the previous year2. Rolling over your 401(k) into an annuity can offer several advantages:
✅ Guaranteed Lifetime Income – Depending on the type of annuity, you can secure a steady income stream for life. Fixed annuities (FA) and fixed index annuities (FIA) guarantee income, while variable annuities (VA) do not.
✅ Market Downturn Protection – FA and FIA safeguard your principal, ensuring that your retirement savings aren’t impacted by market volatility.
✅ Tax-Deferred Growth – Like a 401(k), an annuity allows your money to grow tax-deferred, helping you accumulate more over time.
✅ Additional Benefits – Some annuities, like FIAs, come with income riders that provide extra advantages, such as inflation protection, death benefits, or coverage for terminal illness or long-term care needs3.
However, annuities also have some potential downsides:
⚠️ Limited Liquidity – Annuities come with a surrender period, meaning you may face penalties for withdrawing funds early.
⚠️ Higher Fees – Variable annuities often have higher management fees compared to IRAs or 401(k)s, which can reduce your overall returns.
⚠️ Capped Growth Potential – While FIAs offer market-linked returns, they often have caps or participation rates that limit how much you can earn compared to direct market investments.
Before rolling over your 401(k) into an annuity, consider your retirement income needs, risk tolerance, and the fees involved to determine if this option aligns with your financial goals.
4. Cash It Out
Cashing out your 401(k) is generally the least recommended option and should only be considered as a last resort due to the significant tax implications and penalties. However, it does offer some immediate benefits:
✅ Instant Access to Funds – You get immediate liquidity, which may be useful in financial emergencies.
✅ No Investment Management Required – Since you’re withdrawing the funds, you don’t have to worry about market fluctuations or managing investments.
That said, cashing out comes with serious financial consequences:
⚠️ Immediate Tax Hit – Withdrawals are subject to income tax, which can take a large chunk out of your savings.
⚠️ Early Withdrawal Penalty – If you’re under 59½, you’ll likely face a 10% penalty on top of the income taxes.
⚠️ Loss of Tax-Deferred Growth – By cashing out, you miss out on the power of compounding and tax-deferred investment growth, which could significantly reduce your retirement savings.
⚠️ Jeopardizing Your Future Retirement – The more you withdraw now, the less you’ll have available when you truly need it in retirement.
Bottom Line: Unless you’re in a dire financial situation with no other options, it’s best to consider a 401(k) rollover rather than cashing out your hard-earned retirement savings.
Direct vs. Indirect Rollovers
When rolling over your 401(k), you can choose between a direct and an indirect rollover. It’s essential to understand the difference to avoid unnecessary taxes and penalties.
Direct Rollover: Direct rollover is a recommended option for the rollover in which your old plan administrator transfers the funds directly to your new IRA, 401(k), or annuity without you ever handling the money.
✅ Benefits of a Direct Rollover:
No Taxes Withheld: The money moves from one account to another without tax consequences.
No 60-Day Deadline: Since the funds never touch your hands, there’s no risk of missing the rollover deadline.
Easier Process: You avoid the hassle of handling the transfer yourself.
Indirect Rollover: With an indirect rollover, your old 401(k) provider sends you a check for your balance, and you must deposit it into a new retirement account within 60 days to avoid taxes and penalties.
❌ Risks of an Indirect Rollover:
20% Withholding Rule: Your employer is required to withhold 20% for taxes when issuing the check. You must make up the difference from your own funds to roll over the full amount.
60-Day Rule: If you don’t deposit the funds into a new retirement account within 60 days, the withdrawal becomes taxable, and if you're under 59½, a 10% penalty may apply.
More Administrative Work: You are responsible for completing the rollover properly and ensuring you don’t miss deadlines.
📌 Example of an Indirect Rollover Trap:
John leaves his job and requests a 401(k) withdrawal. His provider sends him a check for $80,000 (after withholding $20,000 for taxes on his $100,000 balance). If John doesn't deposit the full $100,000 (including the withheld $20,000) into a new account within 60 days, the IRS treats the remaining amount as a taxable distribution.
Take Charge of Your Retirement
If you’re still holding onto an old 401(k), now is the time to act. Whether rolling over to an IRA, transferring to a new 401(k), or exploring an annuity, making an informed decision can help you maximize your retirement savings.
Need help deciding what’s best for you? Let’s talk! Making the right move now can set you up for a more secure financial future.
Gajendra Shrestha
Financial Professional
Herriman, Utah
https://www.athene.com/smart-strategies/why-roll-over-a-401k-into-an-annuity.html