Can You Do a Partial Rollover From a 401k to an IRA?
At some point in their careers, millions of Americans will face making a difficult choice regarding their old employer’s retirement accounts; whether to roll over funds or leave them where they stand is one such decision that must be made.
Choices can be more complex than they appear; making the right one will depend on many variables such as tax consequences and your financial circumstances.
Partial rollovers are a good idea in certain situations
Key to making an effective partial rollover is making sure the money goes into an account with similar tax treatment to its original source account, so as to avoid paying unnecessary taxes along the way.
If you need assistance understanding the tax rules applicable to your specific circumstances, consulting with a tax professional would likely be best. However, in certain instances partial rollover may be beneficial.
Rollovers can help to expand your investment options. Since many 401(k) plans only provide limited investment choices, shifting some funds over to an IRA can give you more choices for retirement savings.
One other factor for considering partial rollovers is fees associated with IRAs are generally less expensive than those for 401(k) plans, due to economies of scale from employers pooling workers under one plan resulting in cheaper fees for participants.
If your employer-sponsored retirement account offers limited beneficiary flexibility, partial rollover could be useful to avoid income tax or early withdrawal penalties on any distributions made out of it. You could redeposit 100% of it into another IRA within 60 days and avoid taxes altogether.
They’re a bad idea in other situations
There may be several reasons for not rolling all of your 401(k) money over at once, most notably taxes. All rollovers should ultimately end up in accounts that provide similar tax treatment as their original account – for instance a traditional pre-tax IRA for 401(k) funds and Roth IRA for other forms of funds.
Fees are another consideration. In general, IRAs incur higher investment and service fees than 401(k) accounts, so if there is any compelling reason for switching some or all of your retirement savings over to an IRA it’s essential that you carefully weigh whether those extra expenses outweigh its advantages.
Finally, when rolling over company stock from your 401(k) into an IRA account, any gains realized when selling it through brokerage account could be subject to ordinary income tax rates rather than long-term capital gains treatment provided through direct or trustee-to-trustee transfers.
They’re a good idea in some situations
IRAs typically give investors greater control and choice in investments than 401(k) plans do, which can be advantageous. But it can also be problematic for people who do not wish to manage their own funds.
The Internal Revenue Service doesn’t object if you move only part of your 401(k) into an IRA, provided it receives the same tax treatment as its original retirement plan; that means moving pre-tax money to traditional pre-tax or Roth IRAs respectively.
As part of your 401(k) rollover decision-making, it’s crucial that you consider where you currently are financially and where you anticipate being. For instance, if your tax bracket currently falls into a lower tax bracket but anticipate rising into a higher one later on, investing through a Roth IRA may not be your best bet as it requires paying taxes up front on earnings made during its lifecycle.
If possible, direct rollover is often the superior option. That is because indirect rolls typically withhold 20% for taxes, which could prove costly when trying to move small amounts over. With direct rolls you don’t need extra funds from elsewhere as the amount held back won’t need to come from anywhere – simply meet required minimum distributions instead!
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