Employees who participate in a 401(k) plan can save money for their retirement while also benefiting from tax advantages. When you leave a job where you have a 401(k), you have several options to choose from. One of these options is a 401(k) rollover.
In this article, we will discuss the essential 401(k) rollover rules that you need to know.
What is a 401(k) rollover?
A 401(k) rollover is the process of moving your retirement savings from one retirement account to another. The most common reason for a 401(k) rollover is when a person quits their job and needs to transfer their retirement funds to another account. 401(k) rollovers can be done in three different ways: direct rollover, direct trustee-to-trustee transfer, and indirect or 60-day rollover.
The simplest and most direct way to transfer your retirement funds from one account to another is through a direct rollover. With a direct rollover, your retirement funds are moved immediately from your previous 401(k) account to your new one. This means that you never touch the money, and it is not subject to taxes or penalties.
Direct trustee-to-trustee transfer
A direct trustee-to-trustee transfer is another type of 401(k) rollover. With this type of transfer, your retirement savings are transferred directly from your old 401(k) account to your new account. However, instead of the funds being sent to you, they are sent directly to the trustee of your new account.
Indirect or 60-day rollover
An indirect or 60-day rollover is the most complex type of 401(k) rollover. With an indirect rollover, you receive a check for the amount of your retirement savings, and you have 60 days to deposit the funds into your new account. If you fail to deposit the funds into your new account within 60 days, you may be subject to taxes and penalties.
The NUA Rule
The NUA (Net Unrealized Appreciation) rule is a special rule that applies to 401(k) plans that hold employer stock. This rule allows you to withdraw the employer stock from your 401(k) plan and pay taxes only on the cost basis of the stock. Any appreciation in the value of the stock is taxed at the lower capital gains rate.
Each type of rollover has its own rules and requirements, so it is important to understand the rules before you make a decision. The NUA rule is a special rule that applies to 401(k) plans that hold employer stock. If you have any questions about 401(k) rollover rules, it’s a good idea to contact a financial planner today.
It’s always a good idea to consult with a financial advisor before making any decisions.
Here at Gainspoletti Financial Services, we offer time-tested advice on how to navigate through these options. We’re here for you when it comes to managing your 401(k) plan and making sure it’s as easy as possible for you to take care of business while you’re at your new job.
Contact us to learn more about 401(k) rollovers!
Any opinions are those of Gainspoletti Financial Services and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of the strategy selected, including asset allocation and diversification. Past performance is not indicative of future results.