Can I Move My 401k to an IRA Without Penalty?
If you are switching jobs, your 401(k) funds can easily be converted to an Individual Retirement Account (IRA). Many financial institutions will offer incentives in return for doing business with them such as one-time bonuses and free stock trades.
Your money has several options: you could keep it where it is, cash out or roll it over into another employer plan or an IRA directly – the latter will typically avoid taxes and penalties altogether.
IRA rollovers
Direct rollovers transfer funds directly from one pre-tax account to the next without incurring taxes; it is the most frequently used method for moving funds from a 401(k) into an IRA; however, SIMPLE or SEP IRAs may also qualify.
Direct rollovers don’t owe taxes; however, you must deposit the full distribution into your new IRA within 60 days or else it will be treated as a taxable withdrawal by the IRS and subject to an early withdrawal penalty of 10%.
Typically, you are limited to making one rollover per 12-month period of any kind. Otherwise, the IRS will view it as an early withdrawal and assess income tax and an early withdrawal penalty of 10%. To avoid this penalty altogether, indirect rollover may be used instead; however, this involves receiving a check and depositing it yourself with very specific instructions and rules attached.
401(k) rollovers
When leaving an employment situation, your retirement savings have two options for distribution – either staying within your former employer’s plan or rolling them over into an individual retirement account (IRA). Direct rollover is usually considered the safest choice, since your 401(k) provider sends funds directly to the financial institution that manages your IRA – eliminating tax complications while providing access to low-cost mutual funds or ETFs.
IRA rollovers offer you tax-advantaged retirement savings options with more investment choices than many workplace plans. The process itself should be fairly straightforward, though you may require discussions with providers to complete it successfully. Direct rollover is preferred so as not to trigger mandatory 20 percent withholding for taxes and an early withdrawal penalty of 10%; or transfer funds directly into another company plan such as SIMPLE or SEP IRA for consolidation purposes.
Self-employed rollovers
If you frequently change jobs, it may be beneficial to rollover your old 401(k) into your new employer’s plan or an individual retirement account (IRA). A direct rollover allows the money never to pass through your hands and incur no taxes; by contrast, an indirect rollover requires your old employer to send a check directly to the new plan administrator or IRA provider with 20% withheld for tax purposes.
Rollover benefits of rolling over retirement accounts into an IRA include consolidation into one account with reduced fees, as well as access to more investments than most employer-sponsored plans, including low-cost mutual funds and ETFs. You may even use an IRA with a low fee robo-advisor which manages your portfolio over time – though be wary as there may be limited creditor protection and required minimum distributions (RMDs) after age 73.
Rollover rules
Rollovers of 401(k) accounts can be an excellent way to consolidate retirement accounts and gain greater control of investments, but they do come with risks you should carefully consider before taking the leap. Your financial advisor is there to guide your decisions to find what suits your unique circumstances best.
Financial and tax experts often recommend direct rollovers, in which funds are sent directly from one retirement plan to the other without risk of mistakes or delays, and avoids taking an unintended taxable distribution. You can verify this process has occurred by checking Box 1 on IRS Form 1099-R.
Rolling over your 401(k) into an IRA may provide more investment options and lower fees, yet may not be portable between employers, meaning it might not be accessible for future employment opportunities if necessary. Furthermore, individual IRAs have contribution limits calculated according to each account holder – so be aware of your monthly contribution limits before selecting which account type suits you best.
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