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- You can have the financial institution holding your old 401(k) account deposit it directly to the new custodian.
- If the money is paid directly to you, make sure it’s deposited into your IRA within 60 days or you’ll pay taxes on all of it.
- You might be able to reserve some of the 401(k) for qualifying higher education or first-time homebuyer expenses.
- Consolidating multiple 401(k) accounts can help you grow your investment and avoid forgetting about old accounts.
- Rollovers are commonly made to Traditional IRAs; you’d have to pay taxes on funds deposited into a Roth IRA.
If you are leaving an employer, you have several options for handling your retirement funds. One popular choice is rolling over the already-invested 401(k) funds into an Individual Retirement Account or IRA.
We’ll cover the process and when it may or may not be the best call for your savings.
What Is A 401k Rollover?
When money is transferred from a different kind of retirement plan into an IRA, it’s referred to as a rollover. Money simply moved from one IRA to another is just called a transfer.
Account holders most commonly roll over their retirement savings when they are leaving a previous employer, but some people decide that they’d rather have their retirement savings in an IRA even if they aren’t changing jobs.
Step By Step Guide For Rollover
Rollovers are a time-sensitive process, so it’s important to have a plan in place before you take any disbursements from your 401(k).
The IRS mandates that any funds paid directly to the investor must be rolled over within 60 days, or you will pay the standard disbursement fees just as if you were taking a disbursement in retirement.
The first step for rolling over your 401(k) into an IRA account is to make sure you have an open IRA account with a broker. That way there is somewhere for your 401(k) funds to go.
Second, you need to decide what kind of transfer you want. Some brokers allow an account-to-account transfer, in which the money is moved directly between the financial institution holding your old 401(k) and the one with your IRA.
If you have the money paid directly to you, you have 60 days to deposit it into an IRA or the IRS will tax it like a disbursement. There are some limited exceptions for mistakes made by the banks – but you have to provide proof that it was their error.
Third, you will work with your investment advisor and/or financial planner to decide how to invest your funds. Shop around for an advisor who is as helpful – or hands-off – as you prefer.
Pros And Cons Of Rolling Over Your 401k To An IRA
IRAs can allow more investment options.
Multiple 401(k) accounts can be rolled over to a single IRA for people who change jobs several times.
This makes you more likely to pay attention to your investments and make sure your money is growing at the rate you’re comfortable with.
If you are still working at age 72, you still have to withdraw Required Minimum Distributions (RMDs) from your IRA. If you invest the money in the 401(k) plan of your current employer instead, you don’t have to make RMDs.
You will need to set up a Traditional IRA. If you roll over your funds to a Roth IRA, you’ll have to pay taxes on it.
Other Considerations – Untaxed Distributions
There is a unique provision under which investors rolling over their 401(k) can take an untaxed distribution of up to $10,000 specifically for a down payment on a house.
You must be a first-time homebuyer to take this distribution. You can find more details on the IRS Page on Early Distributions.
Owning Company Stock
If stock in the company you work for is part of your 401(k) investment portfolio, then be sure to speak to an experienced financial advisor about the best way to handle that part of your account.
There are strategies available to reduce the percentage of taxes you will pay on that segment of your investment. This will affect how and when you withdraw your 401(k) funds, so it’s best to get expert advice if that’s your situation.
Frequently Asked Questions (FAQs)
How long do you have to rollover a 401(k) account?
If you have received the money from your 401(k) account as a distribution paid directly to you, then you have 60 days to roll it over into an IRA or another retirement plan.
Otherwise, the IRS considers it an early distribution and taxes it as such.
Why might I want to rollover my 401(k) account?
There are several reasons why you might want to roll over your 401(k) account into an IRA.
1. You don’t like your current 401(k) plan. If the employer-sponsored plan has high fees or doesn’t offer the investment options you want, you may consider a change.
2. You are a hands-on investor. IRAs are more flexible than 401(k) plans, so if you want to make the decisions about your portfolio, it might be a better fit.
3. You left your job. While you could keep your money with the old 401(k) plan, you won’t be able to keep adding to it, and you might even forget about it.
4. You change jobs often. Some careers are more prone to frequent company-jumps. This could result in multiple, small 401(k) plans being managed for you by the companies you no longer work for. This isn’t the best investment strategy and it’s difficult to keep track of all the account information and paperwork for each separate account.