American Funds ®

Retirement Planning

Rollovers

Rolling over your retirement plan assets when you leave a job gives your savings the potential for continued growth. Learn about the benefits of rollover IRAs, and about other options for your retirement plan money.

Leaving a job or retiring is a big change in your life. A rollover IRA gives your money the potential to keep growing. Of course, a rollover IRA is not the only option you have. You should carefully compare all your options to make the best choice for your situation.

Roll Your Money to an IRA

Moving your retirement plan assets into a rollover IRA not only helps you keep the same tax benefits, it also offers a number of other advantages.


Why Choose a Rollover

  • You keep the same tax benefits.

    A traditional IRA gives your money the potential to keep growing tax-deferred. A Roth IRA — like a Roth account in a 401(k) or 403(b) — can provide tax-free growth potential and tax-free withdrawals.

  • You avoid paying taxes and penalties.

    By not cashing out, you won’t have to pay taxes or withdrawal penalties.

  • You take control of your money. 

    Rollover IRAs generally aren’t subject to as many rules and restrictions as employer-sponsored retirement plans. You’ll have more access to your money.

  • You have a wider choice of investments.

    Instead of being limited to the options in your employer’s plan, rollover IRAs allow you to choose from a huge array of investments.

  • You can consolidate your retirement investments.

    Keeping track of accounts from previous employers can be difficult. You can combine them into one account with a rollover IRA.

  • You can continue making contributions to a rollover IRA.

    Income limits may apply for Roth IRAs. The maximum amount you can contribute is $5,500 for 2015. If you’re 50 or older, you can contribute up to $6,500 in 2015. Of course, you don’t have to roll over money to open an IRA.

  • You can avoid required minimum distributions (RMDs).

    RMDs are not mandatory for Roth IRAs. However, you’re generally required to make annual withdrawals from employer plan accounts and traditional IRAs once you reach age 70½.


A Few Things to Keep in Mind

  • You can avoid mandatory income tax withholding with a direct rollover.

    Make sure the rollover funds don’t come to you. The money should go directly from your old plan’s trustee to your rollover IRA’s trustee or custodian.

  • If you choose an indirect rollover, income taxes will be withheld.

    You can still initiate a rollover if you request a cash distribution. However, 20% of the taxable portion of your distribution is withheld from your distribution for income taxes.

    You must then roll over the money into an IRA within 60 days of receiving your distribution if you want to keep the tax benefits.

    If you replace the amount withheld, you can roll over your entire account value. (Your withholding amount will be refunded by the IRS when you file your taxes.)

  • Know what is taxable and what is not.

    When you make withdrawals from traditional IRAs, the money is taxable. With Roth IRAs, you already paid taxes on money going in, but qualified withdrawals, including earnings, aren’t taxable.

    Money in a Roth 401(k) or 403(b) account can be rolled into a Roth IRA. Non-Roth accounts can be rolled into a traditional IRA or Roth IRA. Rollovers to Roth IRAs from non-Roth accounts are taxable.

 


Move Your Money to Your New Plan

Moving your money from old plan into your new employer’s plan may be an option to consider. Be sure to review new employer’s policy on rollovers from other plans.


Why Roll to Your New Plan

Rolling your money into a new employer’s plan gives your retirement assets the opportunity to continue growing tax-deferred. It’s also convenient to have your assets combined into one account.

Your new plan may provide additional benefits, such as:

  • Automatic investing. If your new plan allows employee deferrals, you can take advantage of payroll deductions to regularly contribute to your retirement account. You may be able to contribute up to $18,000 for 2015.

  • Extra contributions. If you’re age 50 or older and your plan allows employee deferrals, the plan may also allow you to contribute even more — up to an additional $6,000 for 2015.


A Few Things to Keep in Mind

  • Your new employer may have rollover restrictions. 

    Your new plan may not accept rollovers from certain types of plans, or it may not accept Roth or other after-tax money.

  • You can avoid mandatory income tax withholding with a direct rollover.

    Make sure the rollover funds don’t come to you. The money should go directly from your old plan’s trustee to your new plan’s trustee.

    If you have a Roth account, check with your new employer to see if the plan accepts Roth rollovers. If the plan does not, you can roll this money into a Roth IRA.

  • If you choose an indirect rollover, income taxes will be withheld. 

    You can still initiate a rollover if you request a cash distribution. However, 20% of the taxable portion of your distribution is withheld for income taxes.

    You must then roll over the money into the new plan within 60 days of receiving your distribution if you want to keep the tax benefits.

    If you replace the amount withheld, you can roll over your entire account value. (Your withholding amount will be refunded by the IRS when you file your taxes.) If you don’t replace the amount withheld, it will be considered a distribution subject to taxes and possible penalties.

  • You may not be able to roll your money into your new plan right away. 

    Some employers may require a waiting period before you can roll your money into the plan.

  • Your investment choices will be limited.

    Your investment choices are limited to what is offered in your new plan.

  • You’ll have to follow the rules of the new plan.

    Participating in your new plan means you’re subject to new investment, exchange and withdrawal rules.

  • You can also save outside the plan.

    Participating in your employer’s plan isn’t the only way to save and receive tax-deferral benefits. If you want to put away additional money for retirement, an IRA is another great way to save.

 


Keep Your Money in Your Old Plan

If you’re undecided about what to do with your retirement plan account when you leave your job, keeping it where it is may be a temporary solution. Check with your employer to review how your plan works.


Why Keep Your Money Where It Is
  • You will maintain your tax benefits.

    As long as you keep your assets in the plan, your account can continue to grow tax-deferred. Roth accounts provide the potential for tax-free distributions.

  • You will avoid taxes and penalties.

    By not cashing out, you won’t have to pay taxes or early withdrawal penalties.

  • You keep your money invested.

    If you’re satisfied with your plan’s provider, you can keep your assets in the same investments.


A Few Things to Keep in Mind

  • You can’t continue to contribute.

    Because you’re no longer an employee, you’re no longer eligible to make contributions to that account.

  • Your investment choices will be limited.

    Your investment options are limited to what is offered in the plan.

  • The rules of the plan will still apply.

    Keeping your account in the plan means you’re still subject to its rules. Your ability to choose investments, make exchanges between investments, or make withdrawals may be restricted.

    Also, you’ll generally have to take required minimum distributions (RMDs) when you retire or reach age 70½, whichever is later.

  • Your balance could be cashed out or rolled into an IRA.

    If your account balance is $1,000 or less at any time after you leave your job, your employer may automatically cash you out unless you elect another option within a certain time period.

    If your balance is between $1,000 and $5,000, your balance may be rolled into an IRA selected by your employer. Ask your benefits department about your plan’s rules.

 


Cash Out Your Savings

Most financial experts advise against cashing out. However, withdrawing your plan balance does give you money to take care of current needs.


A Few Things to Keep in Mind
  • You may have to pay federal taxes.

    Before you receive your payout, your employer must withhold 20% of the taxable portion of your distribution for federal income taxes. Depending on your income tax rate, you may owe even more on the taxable amount.

    Qualified withdrawals from Roth accounts, including earnings, are tax-free. Only the earnings portion of nonqualified withdrawals from Roth accounts is taxable.

    Withdrawals from Roth accounts are tax-free if the account was established at least 5 years before, and if you’re at least 59½ years of age or if withdrawals are made because of disability or death. Withdrawals from your non-Roth balance are generally taxable.

  • You could be subject to penalties.

    If you’re under age 59½ when you cash out, you may have to pay a 10% early withdrawal penalty on the taxable portion of your distribution. If you’re 55 or older when you leave your job, withdrawals are penalty-free but still taxable. (Other exceptions may also apply.)

  • You may be hit with additional taxes.

    You may owe state and local taxes on the taxable portion of your distribution.

  • You can reduce what you owe.

    Instead of taking your entire account balance in cash, consider taking a distribution for just what you need. That way, you avoid paying applicable taxes and penalties on the rest of your account.

    The remaining amount can keep growing tax-deferred if you leave it in the plan or roll it into an IRA or another plan. Roth accounts can be rolled only into Roth IRAs or into plans that accept Roth rollovers.

    Check with your tax advisor or financial professional about the specific rules for lump-sum withdrawals.


Ready to Roll to an American Funds IRA? 

American Funds Rollover Specialists are available from 8:00 a.m. to 8:00 p.m., Monday through Friday, to answer any questions you may have about the rollover process. Or contact your financial professional.


Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses , which can be obtained from a financial professional and should be read carefully before investing.   

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.