Can You Transfer Your 401k Into an IRA Without Getting Penalized?
After leaving an employer, it’s essential to decide how you want to handle their 401(k). One option could be rolling over funds into an Individual Retirement Account (IRA).
An indirect transfer can save you from income taxes and the 10% early withdrawal penalty by directly depositing into a new IRA.
There are two methods available to you when moving funds from a 401k to an IRA: direct and indirect rollovers. When choosing the direct route, your old plan provider electronically transfers your distribution directly into your new account; with indirect rollovers you receive a check which must then be deposited directly into your IRA account yourself. However, any portion that’s subject to tax is subject to an early withdrawal penalty of 10% early withdrawal tax penalty.
Even with tax penalties in mind, a 401k-IRA rollover may still make sense. IRA investments often provide lower annual fees than those charged to participants in 401(k) plans due to employers pooling them together for greater buying power and economies of scale, according to experts. Another advantage is investing in assets like physical real estate or private company stock that aren’t normally accessible within 401(k). But keep in mind that your contributions for both plans have annual limits attached;
Your fees on an IRA will likely be lower than the costs associated with your old 401k plan, making this an important consideration when making the switch.
Make sure that you understand all the guarantees and protections offered by each type of account, such as liquidity/loans, investment options and fees.
401(k) plans can provide more investment options than individual retirement accounts (IRAs). Some even provide tax-deferred loans – something not available with all IRAs.
Make a direct rollover with your former employer’s plan administrator in order to avoid paying fees on your IRA and avoid income taxes or penalties by moving it directly into your retirement account. You have 60 days from when it becomes taxable for this transaction to take place.
IRAs often offer more investment choices than employer plans; if you decide to move your 401k funds over to an IRA however, be mindful that withdrawals prior to age 59 1/2 will incur income taxes and an early withdrawal penalty of 10 percent unless they fall under certain exceptions like first-time home purchases, qualified education expenses, unreimbursed medical costs, disability payments from an IRS levy on your account and health insurance premiums due to periods of unemployment.
If your former employer sends you a distribution check payable directly to you, depositing it within 60 days can enable a direct rollover into an IRA account managed by financial services institutions.
Avoiding mandatory 20% tax withholding by specifying that you want a trustee-to-trustee transfer when making your rollover request. While this method can take more time and may incur additional fees, others prefer moving their funds directly into their checking or savings account, but doing so often results in taxable distributions as well as penalties taxes.
Direct rollover is the easiest and simplest way to transfer funds into an IRA, simply by requesting a distribution from your 401(k). By specifying “direct rollover” as the reason for distribution on any required paperwork, this method eliminates IRS withholding taxes from being deducted at source.
Financial institutions holding your new IRA will then send a check or wire directly to the trustee of your account, eliminating the possibility that any portion of its distribution might remain with you and become subject to tax and early withdrawal penalties if you’re under age 59 1/2.
Some individuals opt to switch their 401(k) investments over to an IRA in order to have more control and lower fees, but before making such a change it is wise to carefully weigh all benefits and risks before forming a conclusion. Consider all fees such as administrative and investment costs when making this comparison as well as liquidity/loans costs, tax advantages and investment options before reaching any decision.
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