401(k) Rollover: The Complete Guide (2021)

Shawn Plummer

CEO, The Annuity Expert

How much do you know about 401k rollovers? 401(k) plans are a great way to save money tax-free, and 401(k)s typically have many investment options. However, there may come a time when the 401k participant decides they would like to change jobs or retire from their current position. This is where 401(k) rollovers become important. Unfortunately, rolling over retirement funds can be difficult with so many different rules and regulations that govern what can be done with 401ks. In this guide, I will discuss some of the basics of 401k rollovers and provide information on how you can make sure your plan complies with all federal requirements before rolling it over to another employer’s qualified plan or an IRA.

You’ll get the benefits of:

What Is a 401(k) Plan?

A 401(k) plan is a company-sponsored retirement savings plan offered by employers to their employees. It has tax advantages to employees saving up for their old age. It is named after a section of the U.S. Internal Revenue Code called 401(k).

The employee who opts for a 401(k) agrees to have a portion of each paycheck paid straight into an investment account. The employer may contribute part or all of the money. Employees generally get to pick from a variety of mutual funds as part of their contribution option.

What is a 401k Rollover?

A 401(k) rollover occurs when an individual employee separates from their employer through a job change, layoff, termination, or retirement. At that time, they will need to decide what to do with their assets in any employer-sponsored retirement plan like a 401(k) plan. The three most common options include keeping their assets in the plan, cashing out, or rolling their 401(k) over into another tax-qualified plan such as a new employer-sponsored plan, Individual Retirement Account (IRA), or IRA annuity.

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Benefits of a 401(k) rollover

You can move your 401(k) to an IRA before you retire. There are many reasons for this, like when you get close to or enter your retirement years.

Consolidate your money to know how much you have.

When you put your retirement money in a single account, you can see how much money is there and how long it will last. This way, you can know what kind of lifestyle your money will support when you are retired.

Withdrawal From One Account

When you retire, it is easier to withdraw your money if it is all in an IRA. However, if you have many 401(k) accounts, you have to be careful and make sure that the money spread across multiple accounts lasts for your whole retirement.

More Investment Options

In an IRA, you will have more investment options than if you had your 401(k). You can customize your portfolio to match what stage of life you are in. You can change it as time goes on.

Transparency and control over fees

You can choose an IRA or annuity provider that has transparent fees, so you know how much you will pay.

While you can benefit from changing your old 401(k) to a new one, sometimes it is better to keep your old one. First, you need to ensure that you are not paying high 401(k) fees or losing money.

If you have less than $5,000 in your 401(k), your company can take it without warning and put it into a safe harbor IRA. This is bad because the fees are higher, and there aren’t as many investment options. This is another reason you should consider rolling over your 401(k) into a better account.

How to rollover your 401(k)

Once you’ve decided to do a 401(k) rollover, the next question is, how should I do it? The most common way is called a direct rollover.

Direct Rollover

If you’re transferring your 401(k) account to an IRA, it’s done through a direct rollover. Typically, the new IRA or IRA annuity will set up the 401(k) rollover for you. Then, it’s just a matter of filling out a few forms. You may also be able to send a paper check from your 401(k) provider to the new IRA provider. You have 60 days to send the check to the new IRA or IRA annuity company before taxes and penalties are applied.

How To Find An Old 401(k)

Contact Your Former Employer.

The easiest approach to check up on a previous 401(k) plan is to contact the human resources department or a third-party administrator (TPA) at the company where you used to work.

U.S. Department of Labor’s Employee Benefits Security Administration

The U.S. Department of Labor has a database for people looking for retirement plans that have been abandoned. This database will help you find out if the plan has been terminated and who to contact about it.

National Registry of Unclaimed Retirement Benefits

Your former employer might have left money for you in a retirement account. You can check to see if they did by going to unclaimedretirementbenefits.com.

Pension Benefit Guaranty Corporation

The Pension Benefit Guaranty Corporation’s Missing Participants Program has recently been expanded to include 401(k) plans.

How Much of a 401(K) is Taxed After Retirement?

Because a 401(k) is a tax-deferred qualified retirement plan, all income withdrawn from a 401(k) is subject to ordinary income taxes.

Typical 401(k) Plan Providers

Reasons to Rollover a 401(k) to an Annuity

Often debated among “financial experts” is whether an annuity should ever be used in a tax-qualified 401(k). Like a 401k, annuities provide income tax deferral. Therefore, it may at first seem redundant to place an annuity inside a qualified retirement plan.

That might be true if the only benefit an annuity offered is tax deferral. But, the fact is, annuities offer many advantages, whether held inside or outside of a 401(k).

Annuities are flexible investment products that can help you achieve your long-term financial goals and provide a source of retirement income. Tax deferral alone is not a sufficient reason to use an annuity in a tax-qualified plan. But income options, death benefit protection, investment selections and services, and flexibility are benefits an annuity can bring to any 401(k).

Tax-Deferral

There are no tax consequences as long as you follow IRS guidelines. You won’t pay any taxes on gains from the annuity until you withdraw your money.

Growth Potential

You can earn additional interest based on the upward movement of an external market index in both bull and bear markets.

Protection from market downturns

In a fixed annuity or fixed index annuity, you will not lose money due to market downturns. If the markets have a down year, you earn zero interest. In exchange for this protection, you are limited on the upside you can get each year, unlike an individual stock through a mutual fund.

A variable annuity will provide unlimited upside potential with no protection from volatile market conditions. However, adding a Guaranteed Lifetime Withdrawal Benefit can protect the annuitant from running out of money due to a stock market crash.

Guaranteed retirement income for life

You can choose to annuitize your annuity to receive annuity payments over a period of time or for life or add an optional income rider to generate a paycheck you can never outlive. Sometimes the insurance company will provide a paycheck that increases to help with inflation and the cost of living.

Flexibility

In addition to an income for life, waivers of surrender charges are often included to offer accessibility to your retirement plan in case of emergencies like entering a nursing home or terminal illness. In addition, there are no limits on annual contributions to an annuity.

Estate Planning

With most fixed indexed annuities, your beneficiaries are guaranteed to receive your annuity’s Accumulation Value or Minimum Guaranteed Value, whichever is greater.

Contribution Match

Like a 401(k) match from your employer, some annuities can offer a premium bonus (up to 15%) on rollovers and additional deposits.

Annuities That Accept 401(k) Rollovers

Shop and compare annuity plans that will accept a rollover from a 401(k) retirement plan.

401(k) Vs. Annuity: A Comparison

Annuity401(k)
No Contribution Limits (non-rollover) Limited Contributions
Insurance or Investment Products Investment Products
Guarantee on Investment No Guarantee on Investment
Tax-Deferred or Tax-Free Growth Tax-Deferred Growth
Pass Down to Beneficiaries Pass Down to Beneficiaries
Spousal Continuance Spousal Continuance
Market Volatility Protection Could Lose Money
Guaranteed lifetime Income Could Run Out of Money

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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