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401(k) and TSP Rollover

What is a 401(k)?

A 401(k) plan is a company-sponsored retirement account that employees can contribute or make matching contributions to. There are two basic types of 401(k), traditional and Roth. In a traditional 401(k), employee contributions help reduce their income taxes; however, their withdrawals are taxed in the year withdrawn. With a Roth, employees make contributions with post-tax income but can make withdrawals tax-free, if certain regulations are followed. Funds will go into your 401(k) before taxes are taken out. These funds are called pre-tax. Money is then invested into various investment vehicles such as stocks, bonds, and mutual funds. These plans are chosen by the provider and individually selected by the plan participant. A 401(k) advisor is beneficial in assisting clients in making the most of their 401(k) retirement account. They are also an important resource to business owners offering a 401(k) to their employers.

TSP Rollovers

A TSP rollover or Thrift Saving Plan* is a retirement plan for federal employees and uniformed services members. Similar to 401(k) plans, they are pre-taxed and able to receive matching contributions. Individuals can choose among five core funds or a target-date fund combining percentages of the five core funds. The investment choices available within the Thrift Savings Plan are as follows (Defined here-


● Lifecycle Funds- a version of a target-date fund

● The G fund- invests in government securities

● The F fund- a fixed income index fund

● The C fund- a common stock index fund

● The S fund- a small-cap stock index fund

● The I fund- an international stock index fund

While the Thrift Savings Plan is more limited in investment options, it is a low-cost option for government workers to save efficiently for retirement.

*The Thrift Savings Plan (TSP) is not affiliated with The Hendershot Financial Group, or The Lincoln Investment Companies.

Choosing the Best Way to Initiate Your Rollover

Direct vs. Indirect Rollover

Your money is transferred directly from one account to another with no money being withheld for taxes in a direct rollover. The original holder of the funds will write a transfer directly to the new holder rather than the account holder. The rollover must be effected within 60 days of withdrawing funds from the original account to avoid penalties and taxes. The purpose of a rollover is to maintain the tax-deferred status of those assets without creating a taxable event or incurring penalties.

Your money is transferred from a tax-deferred 401(k) plan to another tax-deferred retirement account in an indirect rollover. Unlike a direct rollover, the funds are given in a check directly to the employee. Indirect rollovers should be taken with caution. You will want to ensure you've been educated on and considered all possible options. While a direct rollover protects your retirement funds from income taxes and penalties for that tax year, the indirect rollover, if not accomplished correctly, can leave you owing income taxes, an early withdrawal penalty, and even an excess contribution tax.

Prior to rolling over assets from an employer-sponsored retirement plan into another one, it’s important that you understand your options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees and any potential penalties.

Key Takeaways

Whether you are an employee with a sponsored 401(k) plan or an employer offering 401(k) plans to your employees, don't try to navigate the many decisions associated with planning for your retirement alone. An advisor experienced in this field at Hendershot Financial is waiting and willing to help, so you don't have to navigate these waters alone. They will help you make the best possible decisions regarding your situation. It can be confusing to determine which plan is best for you at your current stage in life. A financial professional has years of experience and can help train you in these areas. They can help you avoid making mistakes that can harm you in the long run and ease your mind that your finances are put to the best possible use.

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