Can I Move My 401k to an IRA Without Penalty?
Assuming you do not have an especially compelling reason for leaving the funds at your former employer’s plan, it may make more sense to transfer them into an IRA and take control over your savings account.
Financial planning allows you to invest in more assets than what are offered through company plans, while protecting your retirement savings from creditors.
401(k) to IRA
Typically, the best decision for your 401(k) would be to roll it over into an Individual Retirement Account (IRA). An IRA offers greater investment flexibility at lower fees – not to mention easier management and tracking; moreover, IRS regulations dictate this process and any breaches could prove costly.
If your 401(k) plan administrator cannot transfer the funds directly into an IRA account, have them send you a check made out to the custodian of choice and have it deposited within 60 days for optimal tax and penalty avoidance. An IRA gives you greater control of your money and adheres to standardized regulations while 401(k) plans often have their own set of regulations; your chosen custodian may even offer special incentives like free stock trades – though this should not be your primary reason for selecting them though; when selecting an IRA custodian choose wisely!
IRA to 401(k)
Direct Rollover is the safest method of moving an IRA, as it involves an electronic transfer between financial institutions or a check sent from your old plan directly into your new one. This avoids incurring income tax or penalty fees should you withdraw the money yourself.
An Individual Retirement Account (IRA) gives you more control over how to save for retirement, with lower fees and access to investments not offered through traditional 401(k) plans. Plus, contributions aren’t subject to as many limits.
An IRA provides limited creditor protection–which varies by state. When selecting an IRA custodian, consider one with multiple low-cost investment options, like Schwab Intelligent Portfolios Premium(tm). It automatically builds and rebalances diversified portfolios based on your goals while offering 1:1 guidance from a Certified Financial PlannerTM professional. IRAs can be purchased from banks, brokerage firms, federally insured credit unions and savings and loan associations with IRS approval.
IRA to Bank Account
There are various methods available for moving retirement plan funds from one account to another, but one of the simplest ways is a trustee-to-trustee transfer or direct rollover. In these instances, financial institutions exchange money without incurring taxes or any other consequences.
However, when switching account types (IRA to IRA for instance), be mindful that only one transfer per year from your retirement plan to an IRA can take place, with income limitations (up to $6,500 by 2024) placed upon contributions made into this account type.
Trying to withdraw funds from an IRA before retirement? One way to avoid taxes and penalties is to deposit them back within 60 days into the same account – otherwise you owe 20% withholding tax to the IRS on every amount withdrawn – not just those from employer-sponsored plans such as 401(k). You could even transfer them directly into bank accounts.
IRA to Orphan Account
As workers transition between jobs and companies merge or are acquired, their 401(k) accounts often become orphaned – creating what’s known as an orphaned 401(k).
Orphaned accounts can be transferred directly into another employer plan or an IRA account for safekeeping, so as to minimize tax implications and early withdrawal penalties.
Morningstar reports that direct transfers involve your old account provider sending a check directly to the new institution for deposit in an existing IRA, while any checks sent directly to you must be deposited into one within 60 days or they could become taxable distributions with early withdrawal penalties attached.
Tina Orem is a senior writer for NerdWallet specializing in personal finance and small business topics. Her articles have appeared in national publications like Fortune and Forbes. Based in Chicago, Tina currently lives.
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