When it comes to rolling over a retirement plan, misconceptions abound. Too often this leads to under-optimized savings and incurring unnecessary tax penalties. So as financial advisors, we’re here to bust five rollover myths we hear all the time from clients seeking help.
Something to keep in mind is, while the 401(k) is the most commonly used workplace savings plan, it’s far from the only plan you can roll over.
Maybe you have a 403(b), 457(b), or a SIMPLE IRA. Perhaps you participate in the Deferred Retirement Option Program (DROP) or have a government pension plan. All of these are eligible for rolling over and are applicable in every busted myth below.
Regardless of which one(s) you leverage, if you put contributions in, eventually you’re going to get funds out. How you move those funds is what determines the tax implications, but working with an advisor will help you do so in a way that aligns with your investment goals.
Allow us to provide some clarity.
Myth #1 – Rollovers can only be done with 401(k) balances.
As mentioned above, there are a number of different retirement plans out there, and any of them can be rolled over upon leaving or switching jobs.
The receiving account is typically a traditional IRA or sometimes labeled a “rollover IRA.” This account can receive any pre-tax funds regardless of the specific type of workplace retirement plan.
Myth #2 – There are fees involved with completing rollovers.
One reason people hesitate to roll over their funds from their old 401k is that they wrongly assume it’ll be costly. In general, costs are extremely minimal here — we’re talking $20-$50 for an overnight check or account closure fee.
However, there are a handful of other “traps” out there, and if you’re not wary of them, you could end up costing yourself more than necessary.
Anything worth having generally comes at a cost, but working with an advisor will help you minimize that cost and understand any fees you can’t avoid.
Myth #3 – Employer contributions are not eligible to be rolled over.
If your employer contributes to your retirement plan, those can and should roll over right along with your own.
Sometimes there’s a waiting period for the employer side to roll over, but 99% of the time, you can expect to move the full combined amount.
Now, let’s say your employer only matches contributions once a year, and you leave your job before that matching date. That would be the only situation in which you wouldn’t get to include that year’s employer match in the rollover.
Myth #4 – My money is safer in the 401(k).
This is one we hear a lot, despite the fact that it’s entirely false. Because an employer provides the predictable security of a paycheck and health insurance, people assume it’s the same with a 401(k).
In reality, that 401(k) has no special safety mechanism just because you work for a certain employer. The market can give and take from a 401(k) the same way it does with a brokerage account. The relative safety of an investment is determined by the investment itself — not whether it’s in a 401(k) or not.
Myth #5 – I will pay taxes if I move the money out of my 401(k).
While you do pay taxes on withdrawals from any non-Roth retirement account, a rollover is NOT considered a withdrawal. It is simply moving funds from one pre-tax environment to another pre-tax environment.
Are there still ways to screw this up and generate unnecessary tax bills? Of course!
That’s why it’s important to work with someone familiar with the process. It’s an advisor’s job to know the options, risks, and rewards inside and out. They can guide you through a smooth rollover while avoiding any unnecessary taxes or penalties.
The Bottom Line
There are so many benefits to rolling over an old retirement plan. It’s a great way to diversify your investment portfolio and gain exposure to different asset classes. It also gives you more control over your finances in general.
Don’t let your money sit untouched in an old retirement plan. Educate yourself, and consider taking it a step further by working with a professional. We’re here to help you leverage your rollovers for a stronger financial plan and greater value towards your goals.
You can fill out a form or give us a call to get started today.
The information in this article is for general informational and educational purposes only, and should not be construed as investment, tax, or other financial planning advice.