Have you heard someone talk about “rolling your money” and wondered what the heck that means? This is a financial industry term, and you’re not crazy if you don’t know.
A rollover is a method of moving money from one account to another account. Typically, the term rollover is used to describe what happens with your retirement account when you move from one account to another account that falls under the same tax category—all without incurring IRS penalties or taxes.
Rollovers are worth consideration if (1) you've separated from employment (retired, changed jobs or left for another reason) with a vested balance in a retirement plan; (2) You’re trying to consolidate your retirement assets to decrease the hassle associated with handling lots of accounts; (3) Your risk tolerance or goals lead you to want access to a more appropriate retirement vehicle.
There are several unique situations that may occur when moving money from one retirement account to another; here are some of them:
- Between self-directed, employer-sponsored plans (401(k), 403(b), 457 and Thrift Savings Plan): If you change jobs, you can roll any vested balance from your old plan to your new plan. There are other options for the money from your old plan, so you would choose to do this to have fewer accounts to manage.
- From a self-directed, employer-sponsored plan account into an IRA (Individual Retirement Account): This gives you more investing freedom because most IRAs have access to a larger number of investment options than the typical employer-sponsored plan.
- From an IRA into a self-directed, employer-sponsored plan account: You can do this only if your 401(k) or similar self-directed plan account will allow it. IRAs have access to a much broader array of investment options, so this is only a wise maneuver if you really want to consolidate your retirement dollars for ease and your 401(k) or similar plan has suitable investment options from each asset class.
- From a self-directed, employer-sponsored plan account or an IRA into a pension plan: Some people call this a “rollover,” though it’s not quite the same scenario as other rollovers. Some states allow teachers to purchase years in a teacher pension plan. So, for example, if you want to retire four years early, you can use funds from another retirement account to buy years in your pension plan, allowing you to retire earlier with full pension benefits. The functionality for non-teachers could vary drastically by plan, so obtain your pension plan details and consult a tax adviser and financial adviser to help you decide whether it’s appropriate to use self-directed retirement account money in your pension.
- From a pension into a self-directed, employer-sponsored plan or an IRA: This is technically called a partial lump-sum distribution—pensions don’t generally release full distributions. Note that rolling some money out of a pension will reduce your monthly pension benefit during retirement. When pensions release money for rollover, it’s not generally dollar-for-dollar the same as the amount you contributed. Still, if your pension plan allows it, you can give yourself greater control over your retirement future by putting yourself in charge of investing. You may also want to consider a move like this if you’re worried about the solvency of the employer sponsoring the pension.
Each of these scenarios has consequences associated with the change. You’ll also want to keep in mind that not all options may be available to your situation, so you’ll need to do your homework. If you want someone to guide you through the process, I recommend that you work with a financial adviser and tax adviser to help you find a solution that works for you.
Scott Holsopple is the president of Smart401k, offering easy-to-use, cost-effective 401(k) advice and solutions for the everyday investor. His advice has been featured on various news outlets, including FOX Business, USA Today and The Wall Street Journal.