Moving Your 401(k) into a Rollover IRA – The Basics

February 9, 2022

When you switch jobs, you don’t have to leave your 401(k) plan behind. There are four options for an old 401(k). These include:

  • Cashing it out
  • Keeping it with your former employer
  • Rolling over your old 401(k) into a new employer’s 401(k) plan
  • Doing a 401(k) rollover into an Individual Retirement Account (IRA)

Each of the options has different tax implications. Therefore, it is crucial to understand each before deciding which option to take. Most individuals opt for rolling over a 401(k). It is the transfer of money from that account to an individual retirement account (IRA). This article will help you learn how to roll over a 401(k) into an IRA.

What Is a 401(k) Plan?

A 401(k) plan is a retirement savings plan offered by employers. This plan has a tax advantage for the saver. 401(k) is named after a section of the U.S Internal Revenue Code. There are two main options for a 401(k) plan: Traditional 401(k) and Roth 401(k).

When you sign up for a 401(k) plan, a percentage of your salary is paid directly into an investment account. There are several investment options available for the employee to choose from. Your employer may also contribute towards this investment. It is a defined contribution plan.

What Is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is a form of individual retirement plan provided by financial institutions. The IRA provides tax advantages for retirement savings. There are several types of IRA. Traditional IRA, Roth IRA, SEP-IRA, SIMPLE IRA, and conduit IRA are some of the types of IRA.

Like a 401(k) plan, employers contribute to the investment. Opening an IRA gives you access to several financial products to invest in, including stocks, bonds, and mutual funds. IRAs are meant to be long-term retirement savings accounts.

How to Roll Over Your 401(k) Into an IRA

Follow these four steps to move your 401(k) into a rollover IRA:

Choose the Type of IRA Account to Open

There are several types of IRA accounts to choose from. These types have different tax implications on your investments. Therefore, you have to evaluate the types before opening one.

For instance, if you do a rollover to a Roth IRA, you end up owing taxes on that amount. However, if you do a rollover from a Roth 401(k) to a Roth IRA you won’t incur taxes. For a traditional IRA, taxes are deferred.

Open Your New IRA Account There are two options for getting an IRA. You can either find an online broker or go for a robo-advisor. Your choice depends on how you will want your investments managed. Robo-advisors are suitable if you are not interested in picking individual investments. An online broker is an appropriate option if you want to build and manage your investment.

Get Your Money into Your New IRA

Contact your 401(k) administrator and ask them to send a check or wire your account balance directly to your new IRA account. There are two options; a direct rollover, and an indirect rollover. A direct rollover means that the 401(k) plan cuts a check directly to your IRA account. While an indirect rollover, you withdraw the money and give it to the IRA provider yourself. Indirect rollover, however, can create tax complexities.

Choose Your Investments

Once you get your money rolled into your IRA account, you can choose your preferred investments. IRA offers a range of investment options to choose from. Based on your preferences and attitude towards risk, select a suitable alternative for yourself. The options include bonds, mutual funds, exchange-traded funds, or stocks.

Advantages of Rollover IRA

More Investment Choices

With an IRA plan, you have a large universe of investment choices. Compared to a 401(k) plan, an IRA offers you more investment types to choose from. In addition, an IRA allows risk management investments, such as futures and options.

Lower Fees and Costs

There is an overall annual fee that financial institutions managing 401(k) plans charge. Rolling your money over into an IRA will help you reduce the management fees. The funds offered by 401(k) are also more expensive than the norm of their asset class. With an IRA, you can control how much you will pay for an investment.

Fewer Restrictions

IRA rules and regulations are standardized by the Internal Revenue Services (IRS). On the other hand, 401(k) rules are set by employers. Employers often have a lot of regulations depending on how they want their plans managed.

Financial Incentives

Financial institutions offer incentives to get business. These institutions will give you incentives like bonuses to entice you. Some institutions offer free stock trades as incentives.

Better Communication

If you leave your plan with your former employer, you will have limited access to information regarding the account. Having access to information is crucial when something goes wrong in your former workforce. A rollover IRA will enable you to have ready access to information about your plan.

The Bottom Line

Moving your 401(k) into a rollover IRA has many advantages for individuals switching jobs. Besides, IRA offers you a wide range of investment options. However, it will also help to diversify your portfolio in your search for financial freedom. At Masterwork company, we specialize in bluechip art investment. Join our community today to get more insights.

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