Don’t Rollover Your 401k Into An IRA 🚫 (Do This Instead To Retire Early)
Are you considering rolling over your 401k into an IRA? Hold that thought! There’s an intriguing strategy called the “Rule of 55” that might make you reconsider your options.
🔍 What is the Rule of 55?
The Rule of 55 is a little-known provision that allows individuals aged 55 or older who have separated from their employer to take early withdrawals from their 401k without the usual 10% penalty for early withdrawals.
💡 Key Points:
Age Matters: To utilize the Rule of 55, you must be 55 or older in the year you leave your job. This offers greater flexibility for those approaching retirement.
Separation Required: You need to separate from your employer (quit, retire, or be laid off) in the year you turn 55 or later, to qualify for this rule.
401k Only: The Rule of 55 applies only to 401k accounts, not to IRAs. This means if you roll your 401k into an IRA, you forfeit this unique advantage.
Still Taxable: While you avoid the early withdrawal penalty, you’ll still be subject to income tax on the distributions.
Consider Your Situation: Evaluate your financial circumstances, including your need for funds, investment options, and estate planning, before making a rollover decision.
📊 Weighing Your Options
Rollovers can be a strategic financial move, but it’s essential to be aware of the specific rules and implications. The Rule of 55 highlights that there’s more to the story than meets the eye.
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Drew Blackston, CRC® & RFC®
Office: 813-807-5060
Info@pearlwealthgroup.com
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When it comes to retirement planning, many people are tempted to rollover their 401k into an IRA for the sake of convenience. However, this may not always be the best decision, especially if you are looking to retire early. In fact, there are several compelling reasons why you should think twice before making this move.
Firstly, rolling over your 401k into an IRA could limit your access to funds before the age of 59 ½ without incurring a penalty. While some 401k plans allow for penalty-free withdrawals as early as age 55, IRAs do not have the same provision. This means that if you plan to retire before 59 ½, you may have to pay a 10% penalty on any withdrawals from your IRA.
Secondly, IRAs typically have a more limited range of investment options compared to 401k plans. If you have been satisfied with the investment choices available in your 401k, you may find that transferring to an IRA restricts your ability to diversify your portfolio or take advantage of certain investment opportunities.
Moreover, if you have a traditional 401k and are considering rolling it over into a Roth IRA, you will have to pay taxes on the rollover amount. This could significantly reduce the amount of money you have available to invest for your retirement.
So what should you do instead? One alternative to rolling over your 401k into an IRA is to leave it with your employer, especially if the 401k plan offers a range of investment options and a lower fee structure than an IRA. This will also allow you to take advantage of the early withdrawal provisions available in many 401k plans, should you decide to retire before age 59 ½.
Another option is to consider a “backdoor” Roth IRA conversion, which allows high-income earners to contribute to a Roth IRA by first making a nondeductible contribution to a traditional IRA and then converting it to a Roth. While this strategy has its own complexities and potential drawbacks, it can be a useful tool for those looking to retire early and minimize their tax burden.
In conclusion, before making a decision to rollover your 401k into an IRA, it’s important to carefully consider the implications and explore all available options. By doing so, you can ensure that you are making the best choice to support your goal of retiring early and enjoying a financially secure future.
My husband have a 401k at his job where he still works , but he will be retiring in 6 months at 65 , where can we put the 401k? Do you have any video on that?
Be careful leaving your money in a former 401K. Once you are no longer an employee the fees can be very high, one was going to charge me $65 per month for "management", I quickly moved that to an IRA that I had control of.
I was going to mention this on another of your videos about retiring at 55. Also one can take a SEPP from a 401k at almost anytime though there are upper limits to the amount you can withdraw under a SEPP.
Thank you for this..
I'm working with the hybrid of this rule to take advantage of the more robust investments within an IRA. I retired at 56 and rolled a portion into an IRA. The reaming 401k balance is the income required until age 60.
The Rule of 55 is an optional rule. Companies do not have to support it. This should have been mentioned in the video.
I retired October 1st at age 56, RO55 is my ticket to ride! I don't understand why it's kept in the shadows when it should be out there in the spotlight.
Another reason not to rollover into IRA is if you are still doing Roth conversions. You’ll get taxed on any future Roth conversions because they will filter through a now funded IRA.
I did a rollover from two 401k plans into a rollover IRA. Both were former employers and one of 401k plans was then moved to another smaller management company. This became difficult to manage as both were once part of Fidelity. So both were rolled into an existing Fidelity Rollover IRA where there are far more investment options than with either 401k plus Fidelity has good resources. One other thing to consider about taking a loan from a 401k is that if your job is terminated you are required to pay that money back in full or the IRS will consider it as taxable income. This is why saving outside a 401k/IRA is essential.
Make sure you speak with your 401k administrator first. Because my 401k had rules where it wouldn't let me withdrawal until 59. Even though the IRS says you can have it without penalty.
Thank you Drew very informative like always !!
Hello,
I hope that you can answer my question.
I am 65 and retired 2 years ago. I have
1. Holdings at Etrade
2. A rollover 403b at Vanguard
3. Funds where I retired from consisting of
a. 401a rollover
b. 401a EE After Tax
c. 401a Employer Match
d. 401a QNEC
e. 403b QNEC
f. 403b Roth
g. 403b EE Pre Tax
I want to rollover all that money to Vanguard.
My question is…
– which of these balances a-g can go into my
existing Vanguard 403b rollover?
– Do I open a second account at Vanguard
to rollover whatever is not allowed to be in my
current VG account or can they be mixed in the
Same account and VG does the bookkeeping?
Thank You