How Much Can I Roll Over From a 401k to an IRA?

Many savers opt to convert their 401k savings to an individual retirement account when switching jobs; it’s important to carefully evaluate both its financial benefits and potential costs before making this decision.

Investment fees can be an important consideration; for IRA investors in particular, annual fund fees tend to be higher than in employer-sponsored plans.

How Much Can I Roll Over?

Consider all of your options carefully before rolling over, but there may be several compelling arguments for switching from 401(k) to an IRA. Perhaps more investment options would be more suitable under its tax-friendly umbrella or you simply want to avoid mandatory minimum distributions (RMDs), which must begin once you turn 70 1/2 and require that money from retirement accounts is pulled out regularly.

Direct rollover is the easiest and safest way to transfer funds between retirement plans, as this avoids breaching strict regulations with steep penalties if money is taken out before reaching retirement age.

Taxes on Rollovers

Rollovers between “like-tax” accounts usually do not incur taxes; however, in certain circumstances a rollover could trigger income tax liability.

Example: If you move money from an old employer’s retirement plan into a traditional IRA, the IRS considers this an indirect rollover. When your plan administrator issues checks to you, 20 percent must be withheld from each check before sending it directly. You have 60 days after receiving it to deposit this withheld amount into your new IRA in order to avoid income tax liability.

One key advantage of a rollover is keeping investment growth tax-advantaged, while also opening up access to more investments. IRAs generally offer greater choices than employer plans but may incur higher fees. Your financial advisor can help determine whether this additional cost justifies itself for you in particular circumstances.

Fees for Rollovers

Direct transfers provide the easiest and safest method of rolling over a 401(k), as the money moves directly from one financial institution to the other without risk of accidental triggering taxable withdrawals or early withdrawal penalties, which could be costly.

When your 401(k) plan administrator sends you a check, be sure to follow its instructions exactly or else it could trigger a distribution from your IRA that’s subject to taxes and an early withdrawal penalty of 10% for taking action before age 59 1/2.

To avoid taxes and fees, consider opening a traditional IRA with one of NerdWallet’s top-rated online brokerages or robo-advisors. NerdWallet’s ratings consider fees, minimums, investment choices and customer support; for more information please see NerdWallet’s ratings methodology.

Time to Roll Over

When rolling over your 401(k), there are various approaches available to you. Direct rollover is generally considered the optimal method, where funds move directly from one provider to the next and never touch you personally, thus eliminating penalties and tax bills.

Each IRA institution has different procedures, so for more specifics you should contact them. Some may require that the check be written directly to them rather than you – otherwise they could withhold up to 20% income taxes which will need to be paid later as penalties.

Consider your employer match, if applicable. In general, wait until you are fully vested before rolling them over into a different plan as leaving them at your old employer could cost tens of thousands in fees and limited investment options.

Raymond Banks Administrator
Raymond Banks is a published author in the commodity world. He has written extensively about gold and silver investments, and his work has been featured in some of the most respected financial journals in the industry. Raymond\\\'s expertise in the commodities market is highly sought-after, and he regularly delivers presentations on behalf of various investment firms. He is also a regular guest on financial news programmes, where he offers his expert insights into the latest commodity trends.

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