5 Benefits of 401(k) Rollover

NEW YORK, April 23, 2024 (Newswire.com) - When a person leaves a job with a 401(k), they can choose to cash it out, leave the funds in their current plan, or transfer them to the new employer’s plan. However, it is important to note cashing out a 401(k) may impose early withdrawal fees and taxes. Another option is to roll the funds into an individual retirement account (IRA) such as the one offered by Yieldstreet. 

Retirements can entail 401(k) rollovers as well. Additionally, some companies’ 401(k) plans permit employees to shift funds into outside IRAs while they are still working there in order to continue contributions into an existing plan uninterrupted. This 401(k) “in service rollover” also has certain tax advantages. These types of rollovers also have the potential to promote effective retirement savings management and help diversify investments. 

Here are five tax benefits of a 401(k) rollover worthy of consideration.

1. Potential taxes and fees can be avoided by rolling funds into new plans directly. The key is to avoid converting the money to cash. Rollover checks must be deposited within 60 days into the next plan. This prevents the IRS from looking upon the funds as distributions.
2. Employees whose 401(k) plans include shares of company stock can realize tax benefits when they roll over their plan balances, as long as certain rules are followed. Funds can be withdrawn with more beneficial tax treatment when placed in taxable brokerage accounts—if underlying assets include publicly traded stock in their employer’s company. In such instances, only the difference between the stock’s current value and its value when purchased is subjected to capital gains taxes.
3. Roth 401(k) funds rolled into another Roth account are afforded favorable tax status when the five-year rule is observed. This tenet requires funds to remain intact for five years to avoid or minimize taxes.
4. An employee can avoid tax penalties in a 401(k) service rollover to an IRA if they wait until they're 59.5. However, they will be subject to withdrawal taxes.
5. A big tax bill can generally be avoided by rolling over a 401(k) account to an IRA account that has the same tax status. For example, no taxes are incurred if a traditional pre-tax 401(k) is rolled over into a traditional pre-tax individual retirement account. A 401(k) plan’s tax status can be determined by contacting its administrator for clarification and verification.

For those who opt to receive cash distributions, or leave their plan balances intact, the tax rules for rollovers can be straightforward. The rules can be more complex and restrictive in some cases for those who choose to maintain their plan’s tax-favored status. However, going with a direct rollover to a plan like Yieldstreet’s IRA holds the potential to avoid tax pitfalls. Understanding the rules can help avoid costly tax errors capable of substantially disrupting retirement plans. Speaking with a tax advisor, finance professional or a retirement plan custodian can help ensure the best decisions are made.

Source: Yieldstreet