How to Use a 401(k) Rollover to Optimize Your Retirement Savings
January 23rd, 2025 | 2 min. read
For many, a 401(k) plan is the cornerstone of their retirement savings.
In fact, a Charles Schwab 401(k) study shows workers expect a growing share of their retirement income to come from a 401(k). But what happens when you leave a job or transition into retirement?
One of the most powerful strategies you can use to optimize your savings is a 401(k) rollover. Here’s what you need to know about how it works and whether it’s the right move for you.
What Is a 401(k) Rollover?
A 401(k) rollover is when you transfer the funds from your old 401(k) into another retirement account, such as an IRA (Individual Retirement Account) or a new employer’s 401(k) plan.
This allows you to consolidate your retirement savings, potentially giving you greater control over your investments.
Why Consider a Rollover?
Rolling over your 401(k) can come with several advantages:
- More Investment Options - Most 401(k) plans offer a limited range of investment choices. By rolling over into an IRA, you gain access to a broader selection of investment options, from individual stocks to alternative assets.
- Potential Lower Fees - Some 401(k) plans charge high administrative fees. An IRA sometimes offers lower-cost options, which can save you money over time. Learn more about the benefits of lowering your investment costs here.
- Simplified Management - If you’ve changed jobs multiple times, you might have several 401(k) accounts. Consolidating them into one account makes managing your retirement funds easier.
- Avoid Tax Penalties - When done correctly, a rollover is tax-free. This means your retirement savings continue to grow tax-deferred.
How to Roll Over Your 401(k)
If you decide a rollover is the right choice, here’s how to do it:
- Choose the Right Account - Decide whether to roll over your 401(k) into an IRA or a new employer’s 401(k). Consider factors like fees, investment options and whether you want to keep all your savings in one place.
- Initiate a Direct Rollover - Contact your 401(k) plan provider and request a direct rollover to your chosen account. With a direct rollover, the funds move directly from one account to another, avoiding any tax penalties.
- Invest Wisely - Once the funds are in your new account, take time to select investments that align with your retirement goals and risk tolerance.
TIP: Working with a financial adviser can simplify the process and help ensure that your rollover aligns with your overall retirement strategy. To get started, schedule a free 401(k) review with an Advance Capital Management adviser today.
Potential Drawbacks to Watch For
While rollovers can offer significant benefits, there are a few drawbacks to consider:
- Loss of Unique 401(k) Features: Some 401(k) plans offer perks like access to institutional funds or the ability to take loans, which IRAs don’t provide.
- Pro Rata Rule for After-Tax Contributions: If your 401(k) includes after-tax contributions, rolling them over can be tricky. Consult with a tax professional to avoid unintended tax consequences.
- Creditor Protection Differences: 401(k) plans offer robust protection from creditors under federal law. IRAs provide some protection, but the rules vary by state.
When a Rollover Might NOT Be the Best Option
If you’re close to retirement, you might want to keep your funds in your current 401(k) for easy access to penalty-free withdrawals starting at age 55 (if you’ve separated from service).
Similarly, if your 401(k) plan offers low-cost institutional funds or other unique benefits, leaving your savings where they are might make more sense.
Bottom Line
A 401(k) rollover can be a powerful tool for optimizing your retirement savings, but it’s not a one-size-fits-all solution. The key is to weigh the benefits and drawbacks based on your financial situation and retirement goals. If you’re unsure about your options, consulting a financial adviser can help you make the best choice for your future.
Ready to explore whether a 401(k) rollover is right for you? At Advance Capital Management, we guide clients through the decision-making process to ensure their retirement savings work as hard as they do. Reach out today to get started.
Advance Capital Management is a fee-only RIA serving clients across the country. The Advance Capital Team includes financial advisers, investment managers, client service professionals and more -- all dedicated to helping people pursue their financial goals.
