Transfer Your 401(k) Into an IRA Without Getting Penalized
Once your employment ends, there are various options for handling your 401(k). From cashing it out entirely or moving it to another employer’s plan (which could incur taxes and fees), to rolling it over into an IRA.
IRAs tend to provide more investment choices and lower management fees, making a substantial impactful difference to long-term returns.
Direct rollover
Direct rollover is usually the best method for moving money from your 401(k) into an IRA, since your plan administrator sends a check directly from one retirement account to the other. It is more efficient than indirect rolling, which involves receiving money from former employers and then depositing it within 60 days into your IRA to avoid tax implications.
Direct rollovers can be accomplished in several ways, from paper check to wire transfer. But you must act fast; failing to meet the 60-day deadline could equate to early withdrawal and incur taxes as well as a 10% penalty if you are under 59.5 years old.
IRAs offer several advantages over 401(k) plans, such as reduced fees and more investment choices. Many people opt to roll their 401(k) into an IRA after leaving or changing jobs if they’d like to consolidate multiple retirement accounts into one account at the same time. Some may prefer the tax treatment of an IRA where no taxes are assessed on pretax contributions and earnings before withdrawing money in retirement; another advantage could be its tax treatment wherein tax will only apply when withdrawing it later on.
Before making your decision on a rollover, carefully evaluate your financial situation and where you plan on being financially. If you anticipate being in a higher tax bracket later, moving funds to a Roth IRA might make more sense; but if your current tax bracket is low and anticipate being higher when retiring, paying an upfront tax bill might be worthwhile considering potential future tax savings.
What Can Be Rollover into an IRA? While there are no restrictions on how much you can roll over from a 401(k) into an individual retirement account (IRA), make sure not to exceed annual contribution limits by using an online calculator for that year when planning the rollover.
Note that when conducting a direct rollover, your money does not become yours until it arrives at its new account. Distributions will arrive via check made out to the IRA custodian rather than you. Therefore, acting quickly if attempting a direct rollover is vital.
If you are contemplating a 401(k) to IRA rollover, choose a provider with no account fees and offers a wide variety of low-cost investments. A robo-advisor might be better suited to managing your investments for much lower costs than traditional advisors; here is a list of top robo-advisors; otherwise traditional brokers provide many options, including actively managed mutual funds that might fit the bill.
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