How Do I Rollover My 401k to an IRA Without Penalty?
Rollovers can be an efficient and cost-saving way to move retirement savings from one employer’s plan to the next. An informed move could save tens of thousands in fees alone.
Direct rollover transfers funds directly from an old 401(k) into your IRA without the need for you to intervene; indirect rollover typically involves receiving a check that must be deposited within 60 days.
1. Contact Your Employer’s Plan Administrator
Before switching jobs, it’s essential that your old employer receives your updated contact details in order to avoid complications and ensure you receive benefit statements on time. Otherwise, they could miss out on an important tax deduction or penalty due to out-of-date records.
Your old employer’s human resources department should provide information on which institution holds your IRA funds, so you can contact it and request that the check be made payable directly to your new IRA account. Procedures vary; most brokerages and robo-advisors can accommodate this request without issue; just act quickly: 60 days should be enough time before taxes become due for withheld amounts that would otherwise become taxable income.
2. Contact Your IRA Custodian
Usually, your 401(k) custodian will send a check payable to your new IRA provider. Be sure to include a note or account number so the new provider can apply it directly to your new account. It is advisable to select an IRA provider with various investment options so you can find one that best meets your investment needs.
Consider opening a self-directed brokerage account through U.S. Bancorp Investments that allows you to trade stocks, bonds, mutual funds and ETFs1 without professional help or working with a wealth professional from U.S. Bank or U.S. Bancorp Investments on managing your portfolio and meeting financial goals.
Indirect rollovers can be more complicated. Your employer may withhold 20% from each distribution and you must provide that amount within 60 days or it will be considered a withdrawal liable to income taxes and penalties.
3. Make the Transfer
The exact process may differ slightly between plans, but will typically involve filling out paperwork and communicating. Aim for a direct rollover when possible: this ensures funds go from your 401(k) directly into your IRA without ever touching it yourself – thus avoiding tax complications!
Alternately, your distribution can be sent directly to you in the form of a check made payable to your IRA custodian – this would eliminate the 20% withholding requirement while making the distribution tax-exempt.
Rollover benefits may also include increased investment options (IRAs typically provide more investment choices than 401(k)s), simplified RMDs (since you can consolidate multiple IRAs into one), and beneficiary flexibility – the latter especially pertinent since IRAs generally permit multiple contingent beneficiaries, whereas 401(k)s often limit this feature; depending on your circumstances either option could make sense.
4. Report the Transfer
If your employer allows it, if possible direct the plan to send your distribution directly into an IRA of your choosing – this is the simplest and least taxing way of moving assets over.
Your IRA can be created at either the same financial institution as your former 401(k), a different one altogether or even through a robo-advisor that manages multiple companies’ IRA accounts. Before choosing one institution over another, do your research on all available investment options before making your selection.
At times it may be tempting to leave money with your former employer rather than rolling it over, but that is usually a bad idea. Your retirement savings will continue to accrue tax-deferred until withdrawal – particularly if you hold company stock within your 401(k). An Edward Jones financial advisor can help determine which option is right for you.
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