A 401(k) rollover is a transfer of money from your old 401(k) account to an IRA or individual retirement account or also another 401(k). You will likely do an IRA rollover when you switch to another job. Another option is to keep your 401(k) with your former employer or cash out your old 401(k). We recommend doing a 401(k) rollover as it's an effective way to consolidate your retirement accounts and watch your investments.
While you can do a rollover at any time, the IRA only allows one rollover per year rule. This means you can't do a rollover more than once from the same IRA within a year. The rule applies regardless of how many individual retirement accounts you own. However, this rule doesn't apply when you do rollovers from your traditional IRA to a Roth IRA, IRA to plan rollovers, plan-to-plan, plan-to-IRA or trustee-to-trustee transfer to another individual retirement account.
Should you decide to roll over 401k to IRA, this means that the money saved from your old account must be transferred to your account within 60 days. Below are the steps you need to take for a successful IRA 401k Rollover:
1 Choose what type of individual retirement account to open.
A 401(k) rollover may give you several investment options and lower your fees depending on the type of account. You will need to pay taxes if you roll over to a Roth IRA, but taxes are deferred when rolled over to a traditional IRA. There's no need to pay taxes when you roll over from an old Roth 401(k) to another Roth IRA.
2 Open the new IRA account
Do you intend to manage your own IRA, or are you planning to get a robo-advisor to manage your account? While you can buy or sell investments on your own through an online broker, we suggest that you hire a professional to ensure that you maximize the benefits of your 401(k) rollover.
3 Do a direct rollover
With a direct rollover, this means that the 401(k) plan will cut a check directly to your new account, and you won't be able to cash it out. It's a good option because you get to avoid paying taxes when you decide to withdraw the money yourself. However, they may withhold 20 percent from your check as taxes for your distribution when you do an indirect rollover. And the only way to get this money is by depositing the complete account balance into your retirement account within 60 days.
4 Choose investments
Choose your investments after the money has been rolled over to your new IRA account.
When choosing the best investment, we recommend that you get professional help, especially when you don't have enough experience with the different investments available. Some people may go with stocks and bonds, but this approach is best only for those experienced or professional investors. Low-cost mutual funds and a little diversification may be beneficial. Keep in mind that it's best not to put all your eggs in one basket when investing money.
Doing an IRA rollover may be beneficial, but it's important to also follow the rules. Failure to comply with the rules may result in extra taxes and penalties. For example, when you don't deposit the account balance within 60 days, they may take a 10 percent early withdrawal penalty fee, which is on top of other taxes you may pay.
It's also important to understand the implications of taking out a loan against your account. Ensure that you know the pros and cons and that you carefully weigh out your options. Consider speaking with a professional advisor to avoid issues or more penalties or taxes down the road.
Doing a 401(k) rollover to an IRA has its advantages. You get to have diverse and even more affordable investments with lower account fees. It's also an effective way to organize your retirement funds and easily access them. Most importantly, many individual retirement accounts don't charge fees for an IRA rollover.
If you're planning to do an IRA rollover, please don't hesitate to get in touch with us. Our team of experienced professionals is fully committed to helping you maximize the benefits of your retirement accounts. Talk to us so we can review your options and provide you with the best financial solutions. Call us today!