The decision to roll over a 401(k) — financial-speak for moving money into another retirement account — should not be taken lightly. What you do with a 401(k) from a former employer can have major tax consequences today and in retirement. You should carefully plan out your rollover strategy to get the biggest retirement reward.
Rollovers are popular: The most recent data from the IRS states that approximately 6.1 million taxpayers rolled over about $727 billion in eligible distributions from qualified retirement plans like 401(k)s in tax year 2021. One reason is just for simplification. Imagine yourself, retired, looking at three or even four 401(k) plans from past employers and trying to devise a withdrawal strategy that meets your retirement income needs. Then, imagine the burden of tracking taxes on multiple traditional 401(k) account withdrawals. That's a hard pass!
