What Accounts Can I Roll My 401k Into?
Many individuals maintain retirement savings accounts with multiple employers, which can make keeping track of them both time-consuming and costly. If any old accounts carry high account fees, managing them all may become tedious or cumbersome.
Transferring an account into another tax-advantaged one may help you save money, but how can you select the most cost-effective options?
Traditional IRA
A 401(k) rollover allows you to transfer your retirement savings into an Individual Retirement Account (IRA). This move enables you to invest your savings free from employer restrictions, while possibly making greater contributions than could have been allowed under your previous plan. IRAs generally have lower minimum contribution limits than 401(k)s, with some offering even higher limits, such as SIMPLE IRA and SEP IRA accounts.
As with any investment account, selecting an IRA requires choosing an institution such as a bank, brokerage firm or robo-advisor with whom to manage it. Furthermore, direct rollover will help avoid mandatory 20% withholding tax and 10% penalties associated with early withdrawals while saving fees that would otherwise eat into your investment returns over time. Furthermore, an IRA usually boasts lower management fees than its 401(k) counterpart.
Roth IRA
Rolling your 401(k) into an IRA may provide many advantages, such as lower fees and expanded investment choices, but it must align with your financial goals and the rules set out by the authorities.
One of the most popular forms of retirement accounts, Roth IRAs offer unique tax benefits. You can contribute after-tax money and you won’t owe taxes until it comes time to withdraw earnings in retirement.
While transferring directly is certainly appealing, keep in mind that not all IRAs will accept direct transfers from your old 401(k). An indirect rollover could result in tax-exempt distributions at withdrawal time – best to use this strategy only when absolutely necessary and make sure your new IRA account is empty first otherwise an early withdrawal penalty of 10% may apply.
Annuity
An annuity is a financial product that turns your savings into a regular stream of income for life, making it an attractive option for retirees looking to secure their retirement income, yet comes with fees and charges such as commissions, mortality and expense risk charges, administrative fees, and fund management fees that could significantly erode investment returns.
However, you can avoid these fees by rolling your 401(k) into an annuity that is tax-free – providing it is qualified annuity as otherwise you could incur taxes and surrender charges.
Rolling your 401(k) can also provide a wider selection of investments than what would otherwise be available through traditional IRAs or employer plans, making it easier to diversify your portfolio and ensure there will be enough money in retirement to cover expenses. A financial planner can help project future income streams and identify suitable annuity strategies for you.
High-interest savings account
Savings accounts offer a safe and simple way to put aside funds for emergencies. They usually feature competitive interest rates that are FDIC-insured compared to investments such as 401(k). Savings accounts can be found through several banks – both brick-and-mortar institutions as well as online banks – with customer-friendly features like mobile apps, ATM cards and no monthly fees included as added perks.
Investment accounts with higher-than-average interest rates may help you save more for retirement, especially if your employer offers an incentive program. They also make great places for stashing tax refunds!
Consider moving your 401(k) into an individual retirement account (IRA). An IRA provides access to more investment options than what may be offered through workplace plans, including mutual funds and exchange-traded funds (ETFs), according to Bankrate. Furthermore, an IRA gives more control over your portfolio by giving access to nontraditional assets like real estate as potential investments – although this might not be suitable for everyone.
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