Can I Move My 401k to an IRA Without Penalty?
Direct rollover is the ideal method for moving a 401(k) account to an IRA, as this will protect against income taxes and early withdrawal penalties if you’re under 59 1/2.
IRAs offer many advantages not found in workplace retirement plans, including more investment choices and enhanced tax benefits. Learn about all your options for rolling over your 401k into an IRA.
1. Direct rollover
Transfers and Direct Rollovers are the two ways of moving funds between retirement accounts without incurring adverse tax consequences: withdrawal from former employer plans to another financial institution with withdrawal fees charged (Human Interest does not) as well as sending IRS Form 1099-R form reporting the transaction.
Direct Rollover involves moving funds directly from one account trustee to another (i.e. 401(k) trustee into an IRA trustee). When completed correctly, this method prevents any mandatory tax withholding requirements from taking place.
However, it’s essential to keep in mind that if an original cash out distribution is not directly rolled over into an IRA within 60 days, any federal and state withholding could be considered taxable income and could incur the 6% excess contribution penalty annually until corrected. To protect yourself from this risk, always follow instructions provided by your new provider and report any rollover on an amended tax return if applicable.
2. Indirect rollover
If you are under 59 1/2, and receive distributions from an employer retirement plan such as a 401(k), indirect rollover is permitted without incurring taxes and penalties. This process involves liquidating assets to get their value, writing a check for that amount in your name, then redepositing it within 60 days into another plan or IRA.
As taking actual custody of the distribution can increase the risk of not making your required minimum deposit (RMD) on time to avoid an excess contribution penalty, direct rollover and transfers may be preferred when possible. It’s essential not to let 60-day clock run out – otherwise taxable distribution will result. Typically, any withheld taxes will be returned when filing annual tax returns.
3. Rollover to a new employer’s plan
If your new employer’s 401(k) plan allows rollovers, you can move the balance from your old account directly into it. This process usually involves trustee-to-trustee transfers; your new plan should inform you how it should be conducted. Keep in mind that you must report this transaction when filing taxes with the IRS.
Moving the money into an Individual Retirement Account (IRA) is another viable solution, whether done on your own or through a brokerage or robo-advisor who will create an investment portfolio on your behalf. Bankrate has reviewed some of the top places where IRAs can be converted, including ones offering both self-directed options as well as professional management.
Cashing out may also be an option, though this could come at a steep cost. Your former employer will withhold 20% for Uncle Sam, and you have only 60 days to return it into a tax-advantaged account or incur a 10% early-withdrawal penalty.
4. Rollover to a new IRA
Direct rollover allows you to establish a new IRA at your desired financial institution, with benefits including exploring investment options and services provided by various institutions, including self-directed IRAs. However, your IRA must accept this rollover within 60 days otherwise it will be treated as withdrawal and subject to income taxes and an early withdrawal penalty of 10%.
Rolling over a 401k into an IRA can be straightforward. Simply contact the plan administrator of your former employer’s plan, complete and return any required forms, and request that they send your account balance via check. From there you can choose an IRA that best fits your investing strategy or even consider using a robo-advisor which offers cost-cutting investment management solutions at a fraction of traditional advisor costs. Whatever you do though, don’t cash out — doing so could undermine your retirement savings efforts while incurring penalties from both your former employers as well as taxes levied by IRS authorities.
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