Can You Do a Partial Rollover From a 401k to an IRA?
Many individuals who change jobs often face questions regarding how to roll over their 401(k). A partial rollover may be preferred; however, be wary that there may be restrictions and follow the rules carefully in order to comply. According to IRS regulations, financial institutions must withhold 20% of distributions which must then be transferred within 60 days into an IRA account in order to avoid taxes on this portion.
Partial rollover is an effective strategy for those looking to keep some of their money in their former employer’s retirement plan while also having access to a more flexible IRA with reduced fees and greater investment options. It should be noted, however, that if your former employer issues you a check instead of directly to an IRA custodian it will be considered a distribution and subject to tax and the 10% early withdrawal penalty for those under age 59.5.
Direct rollovers occur when one financial institution sends funds directly from one account to the new IRA and then closes down the old account. An indirect rollover occurs when your former plan sends you a check that you need to endorse and hand over to the new financial institution – in this instance 20% will be withheld as tax. Neither the IRS or State may tax a distribution between pretax accounts but might when mixing pretax with post-tax accounts.
Though many assume a rollover must be all or nothing, partial rollovers may make sense in certain circumstances. For instance, your current 401(k) plan may charge excessive individual investment fees and service charges that can be avoided by moving to an IRA provider instead. Careful consideration must be given when considering which provider offers which fees before deciding if a partial rollover makes sense for your situation. Working with an independent financial advisor who can optimize retirement savings plans could also be advantageous; SmartAsset’s advisor matching tool can assist with finding professionals near your location.
Partial rollovers may incur extra costs, yet their benefits can be considerable. When considering rolling their 401(k) over to an IRA, investors should carefully weigh both its advantages and disadvantages before making their decision. IRA investments tend to incur higher fees than employer-sponsored accounts; to limit extra charges and fees, consider working with an online broker or robo-advisor that offers low account fees and minimums.
Although IRAs provide tax advantages, there are some key distinctions between them and 401(k) plans that you should keep in mind. A 401(k) typically offers more investment options than an IRA plan and may incur additional layers of fees that reduce returns.
If you roll over a 401(k) into an IRA, its distribution will be reported on IRS Form 1099-R and includes both total distributions as well as any required 20% withholding payments. Direct rollovers involve receiving distribution checks directly and depositing them directly into an IRA before writing another check to cover any outstanding balance. Ideally indirect rollovers should be completed within 60 days to avoid penalties being assessed against indirect rollovers.
Be wary when rolling over your retirement assets, as even simple mistakes could have serious repercussions. For example, withdrawing funds from a 401(k) to give to an ex-spouse may incur an early withdrawal penalty of 10% and is prohibited without first having obtained a qualified domestic relations order (QDRO) as any amount distributed will be considered ordinary income tax liability.
Partial rollovers may be worthwhile for several reasons. For example, if your former employer’s 401(k) plan provides access to investment options not available through an IRA, leaving part of your retirement funds behind could allow for diversification without incurring extra costs.
Similar to IRAs, some 401(k) plans tend to offer lower fees because they pool workers into one plan and can achieve economies of scale. Furthermore, many providers of 401(k) plans offer low-cost index funds which could save you money.
Rollovers of partial 401(k) accounts can be done tax-free as long as funds are transferred between accounts that provide similar tax treatment – for instance transferring pre-tax 401(k) funds into either a traditional IRA or Roth IRA for instance. Furthermore, if your 401(k) contains appreciated company stock that would qualify under net unrealized appreciation (NUA) rules it might also make sense to consider rolling all but that stock over.
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