Many people decide to roll over their 401(k) plan to an IRA after they switch employers since they won’t be able to make contributions to the account after they leave their former employer.
However, people who are 59½ or older may be able to roll their 401(k) over while still working for their current employer and still avoid early withdrawal penalties and those funds being taxed.
Typically, distributions from a 401(k) plan are taxed as ordinary income. But, if the saver takes a distribution before they are 59½ years old they will typically pay a 10% federal income tax penalty on top of the 20% that will be withheld for taxes.
Additionally, anyone who is over that age and wants to make a one-time withdrawal from their account before they want to start their regular minimum required distributions could also face those taxes and the penalty as well.
How the special rollover works
This special provision allows participants to take 401(k) withdrawals — without providing proof of hardship — if they have reached age 59½ or have met the requirements specified by the plan document. These savers have the option to directly transfer savings to an IRA without penalty or withholding if the funds are rolled into an IRA within 60 days.
If the 60-day period passes and the IRA rollover is not completed, the saver would be subject to all taxes and penalties associated with an early withdrawal.
This rule is in place to allow individuals who reach age 59½ to access their funds and move them into accounts they control, such as an IRA. They may want to do this if their 401(k) plan has limited investment options compared to their IRA.
With an IRA they may have more flexibility in terms of the types of assets and investments vehicles to which they have access. Moving funds to an IRA may provide a better opportunity to develop an investment strategy for their remaining working years as well as an income plan that will fit their needs in retirement.
Before considering one of these transactions, we can help you look at all your options and develop a strategy that is best for your situation and retirement plans.