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401k Rollover

A 401(k) rollover is the transfer of funds from a 401(k) to an individual retirement account (IRA) or another 401(k). Usually, funds must be deposited into the new account within 60 days of being removed from the old account according to the Internal Revenue Service (IRS) rules for 401(k) rollovers. If you leave a place of employment where you had a company-sponsored 401(k), you will need to decide what to do with the funds in your retirement account. There may be numerous options available to you for your 401(k) rollover, including a 401(k) rollover to a new employer’s plan or a rollover into an individual retirement account, called an IRA rollover.


IRA Rollover


A 401(k) rollover to an IRA has excellent benefits. A rollover 401(k) benefits to an IRA include having more diversity in investment selections than a standard 401(k) plan and potentially having lower account fees. Many IRAs do not charge any account fees whatsoever. A 401(k) rollover to an IRA is essentially broken down into four distinct steps:


  1. Choose which kind of Individual Retirement Account (IRA) to open.
  2. Open your new IRA account.
  3. Ask your 401(k) plan sponsor for a direct rollover or follow the 60-day rule.
  4. Choose your investments.


A financial advisor is someone who can help you decide where to allocate funds for investments and which kind of account will work best for you and your individual needs. A Roth IRA rollover will be taxed upon completion. A traditional IRA rollover is tax-deferred. However, if you do a Roth 401(k) rollover to a Roth IRA, you will not incur any additional taxes because they are the same type of retirement account from a tax standpoint.


401(k) Rollover Rules


401(k) rollover rules vary based on certain factors. For example, the kind of 401(k) and type of account you want to rollover your 401(k) into will make a difference as to the amount of taxes you may need to pay, fees you may incur, as well as any other consequences. This is why it is essential to get a financial advisor involved in your 401(k) rollover. A financial advisor will know the ins and outs of 401(k) rollover rules and guide you to make the best decision for you and your unique situation. Financial advisors can also help you to avoid an unexpected tax burden. Some things to keep in mind as you navigate your 401(k) rollover are:


  1. A traditional 401(k) is funded with pre-tax income.
  2. You will owe taxes on these funds once you begin withdrawing them, usually at retirement.
  3. A Roth IRA is funded with post-tax dollars, so you pay taxes upfront before the money is deposited into your account.
  4. If you rollover a traditional 401(k) to a Roth IRA, you will owe taxes in that tax year, but you will not owe taxes when these funds are withdrawn at retirement.
  5. An immediate tax burden may be avoidable by dispersing after-tax funds to a Roth IRA and pre-tax funds to a traditional IRA.
  6. Every year, the IRS reviews and sometimes makes adjustments to the maximum contribution limits for 401(k) plans, individual retirement accounts (IRAs), and other retirement savings accounts. Individuals aged 50 or over may be eligible to make “catch-up” contributions above the annual limits.


Key Takeaways


The most important thing to remember when you have a 401(k) rollover to complete is that there are a few things that you must consider before finalizing your 401(k) rollover. Fees, the range/quality of investments in your 401(k) versus an IRA, and the 401(k) rules are a few examples. Remember that you must take action swiftly because not doing so can cause unnecessary fees during a 401(k) rollover. If you are unsure, confused, or even overwhelmed by the many options available to you, call us today, we can help. Utilizing a financial advisor will alleviate any stress or concerns you might have and open you up to information that you may not have access to normally.