End-of-Year 401(k) Rollover Strategies

The end of 2024 is rapidly approaching, making now a perfect time to review your retirement savings and take strategic steps to maximize your benefits. No matter where you are in your career, one of the most effective strategies you can use before year-end is a 401(k) rollover. 

A 401(k) rollover transfers funds from a 401(k) account to another tax-advantaged retirement account. Once contributors pull money or assets out of these accounts, the IRS grants contributors 60 days to roll it into another retirement plan. Whether changing jobs, planning for retirement, or simply optimizing your investments, understanding your 401(k) rollover options can significantly impact your retirement savings.

The Importance of a Year-End Financial Review

Year-end financial reviews are essential to ensure your money is working for you — and that includes assessing your retirement savings. Knowing your 401(k) rollover options is critical for many reasons. If you’re close to retiring, exercising rollover options may help better support your savings strategy for the upcoming year. Additionally, upcoming changes to tax laws and 2025 contribution limits may affect your savings potential and withdrawal strategies. By addressing these factors now, you can minimize potential setbacks and help set yourself up for retirement optimization.

Understanding 401(k) Rollover Options

You can handle 401(k) rollover in several ways. Knowing your options can help you make an informed decision that supports your specific savings goals. Some of the most common 401(k) rollover choices include:

Roll Over to an IRA
This is a popular option for many individuals because it allows for more investment choices and may offer increased control over your funds. When effectively executed, moving to an IRA can also help avoid taxes. When rolling assets into an IRA, you’ll have three choices:

• Traditional 401(k) rollover to Traditional IRA: You can defer taxes on money rolled over and investment earnings until you retire and take distributions. This means that as long as you comply with requirements, you can avoid tax implications.
  
• Traditional 401(k) rollover to Roth IRA: It’s important to note that a Roth IRA account is an after-tax account. As a result, you will incur tax consequences when you roll pre-tax contributions into a Roth IRA. Still, this strategy can have potential benefits in the future since qualified distributions from your Roth IRA account won’t incur taxes.
• Roth 401(k) rollover to a Roth IRA: These accounts are funded with after-tax dollars. As a result, you won’t incur taxes when transferring funds.
  

Transfer to a New Employer’s 401(k) Plan
If you’re switching jobs, you might consider rolling over your existing 401(k) into your new employer’s plan. This can be convenient if you prefer to manage all of your retirement funds in one place.

Leave It in Your Old 401(k)
Some employers allow former employees to leave their funds where they are after they leave the company. However, staying put may restrict or limit investment options and may result in higher fees over time. 

Cash Out
Although you can take a lump-sum distribution, this option is generally not advisable due to the hefty tax penalties and potential early withdrawal fees, which can significantly reduce your retirement savings.

Strategies for Maximizing Retirement Savings Through Rollovers

A well-timed 401(k) rollover can boost your retirement savings by offering better investment options, reduced fees, and more control over your assets. Here are a few key strategies to consider before the end of 2024:

Assess Your Investment Options
Rolling over into an IRA may grant you access to a wider range of investments, including stocks, bonds, and mutual funds, which may not be available in your current plan.

Take Advantage of Employer Matching
If you’re transitioning to a new job, check whether your new employer offers matching contributions as part of their plan. Rolling over into the new plan could help you maximize these benefits.

Optimize Based on Retirement Dates
Couples with different retirement dates often want to stagger withdrawals or distributions to maximize tax benefits. If you and your spouse have different career timelines, you may want to consider transferring some of your funds into an IRA to align your savings with your overall retirement goals. 

Minimize Fees
Some 401(k) plans come with high management fees, which can erode your savings over time. Rolling over to an IRA or a lower-fee plan can help reduce these costs and keep more of your money working for you.

Tax Considerations for Year-End Transfers

Understanding the tax implications of a 401(k) rollover is essential for making informed decisions. Discussing tax considerations with a qualified professional is critical to ensure you’re making the right decisions for you. However, there are some important factors to keep in mind:

Avoid Immediate Taxes with a Direct Rollover
A direct 401(k) rollover allows funds to be transferred directly to a new plan or traditional IRA without incurring immediate taxation. This method avoids the mandatory 20% withholding tax that applies if you take a distribution yourself before rolling it over.

Roth Conversion Considerations
As already noted, funds rolled into a Roth IRA are subjected to income tax in the year of the transfer. This can potentially increase your overall tax liability. However, it does allow for tax-free distributions once you’ve retired. Given the possibility of higher tax rates in the future, converting to a Roth IRA before 2025 might be a smart move.

Required Minimum Distributions (RMDs)
The IRS requires participants over 73 to take RMDs from retirement accounts. It’s essential to factor this requirement into your overall transfer strategy. Failing to take the necessary RMDs could result in significant taxation. 

Steps to Implement Before The Clock Strikes 2025

To ensure you’re maximizing your retirement savings through a 401(k) rollover, follow these steps before the end of 2024:

Consult a Professional Financial Advisor
First and foremost, consult with a professional retirement planner or tax advisors. A qualified professional will evaluate your specific situation. From there, they can offer insights on the complexities of transferring your funds and help you create a plan tailored to your needs. 

Review Your Current 401(k)
Review your account statements, investment options, and fees associated with your current savings plan. This will help you determine whether rolling over is the best option.

Prepare for Changes in 2025
Be aware of any legislative changes or adjustments to contribution limits that may affect your rollover strategy. For example, higher contribution limits in 2025 could provide new opportunities to save, but any changes in tax law may impact your rollover decisions.

Contact Lunsford Financial Planning Today

The end of 2024 presents a valuable opportunity to reassess and optimize your retirement savings. Lunsford Financial Planning can help. Schedule a call with Shannon Lunsford, CFP^®, today to discuss your year-end plan.

Certified Financial Planner Board of Standards Center for Financial Planning, Inc. owns and licenses the certification marks CFP^® in the United States to Certified Financial Planner Board of Standards, Inc., which authorizes individuals who successfully complete the organization’s initial and ongoing certification requirements to use the certification marks.