As your professional career takes shape, it involves job changes. Instead of keeping tabs on multiple accounts, a 401k rollover makes better sense. Rolling over your old 401k into an IRA (Individual Retirement Account) rewards you with lower fees and more investment choices.
For an IRA rollover, the money from your old 401k typically goes into your new IRA account within a 60-day timeframe. Should you decide to opt for a direct 401k to IRA money rollover, you are presented with the listed options:
- Traditional 401k rollover to Roth IRA for which taxes are levied on the rolled-over sum
- Rolling over from Roth 401k to Roth IRA does not attract taxes
- Taxes are deferred when you undertake traditional 401k rollover to IRA
401k Rollover to IRA Rules
When you choose a direct rollover, the funds from your old 401k must be credited to your new IRA account within a 60-day timeframe. You can initiate the rollover by contacting your former employer and completing the requisite forms.
Your IRA account provider will share details on the inputs to be included in the check or wire and where they must be sent. Pass on these details to your former employer and request your 401k account balance to be wired to your new IRA account provider.
An indirect 401k rollover implies you withdraw the balance amount and hand it over to your IRA provider. However, carrying out such a rollover 401k to IRA creates tax complexities that are best avoided. To refrain from adding to your tax burden, conform to these applicable rules:
In the case of an indirect rollover, ensure you deposit the 401k distribution money into an IRA within 60 days of receipt. Should you miss the deadline, the IRS may deem it an early withdrawal and levy a 10% penalty over and above your income tax dues.
Include Amount Withheld for Taxes
Your former employer will issue a check worth your 401k balance after withholding 20% towards taxes that your distribution attracts. This applies to processing an indirect workplace retirement plan rollover.
However, you must deposit into your IRA an amount that covers the complete account balance, including taxes withheld. Rolling over from a traditional 401k plan to a Roth IRA also attracts additional taxes.
By rolling over the entire retirement plan balance, the IRS refunds the amount withheld by your former employer in taxes when the due time arises. You also avoid that early withdrawal 10% penalty on the taxable sum.
On completing your 401k rollover to IRA, you can wisely invest the amount that accumulates in your retirement account. ETFs (Exchange-Traded Funds), low-cost index mutual funds, and target-date funds are famous avenues to divert your available rollover funds.
Are you thinking of cashing out from your 401k old accounts instead? This often becomes an expensive proposition as you are levied with avoidable penalties and taxes on the amount received. Rolling over assures you of savings as your money grows tax-deferred.
Approach a reputed financial advisor who genuinely listens by engaging in transparent discussions and assisting you in curtailing your risk exposure.