Can I Move My 401(k) to an IRA Without Penalty?
IRAs offer greater control and choice with lower fees; but before moving your 401(k) funds over, check with the IRA institution first to ascertain any necessary procedures or paperwork that must be followed.
Typically, to avoid taxes and penalties on an account you must roll it over within 60 days – this applies to most people but there may be exceptions or workarounds available to them.
Taxes
IRA accounts offer more investment choices than 401(k) plans, such as low-cost mutual funds and ETFs. Unfortunately, however, their values don’t always grow with time – you could end up losing money when markets experience declines.
Direct rollover is the easiest and recommended method for transitioning your 401(k) to an IRA. Simply contact your plan provider and ask them to transfer distribution directly. Each plan provider offers different procedures; some even do it all online!
Some 401(k) plans contain both pre-tax and Roth assets, so when rolling over into an IRA it’s important to keep them separate. Furthermore, company stock that may have unrealized gains should also be separated before rolling them over into an IRA. Each brokerage or robo-advisor has different procedures for rolling over 401(k) assets; follow those closely in order to avoid taxes and penalties on your account. Once transferred over, you should receive a check from your old plan provider which must be deposited within 60 days into your new account in order to avoid taxes and penalties on it.
Fees
If you are changing jobs, consider switching your 401(k) to an individual retirement account (IRA). This enables you to track all of your investments easily while potentially lowering fees and providing access to more investment options and funds. Most brokerages, mutual fund companies and robo-advisors make setting up an IRA easy.
When moving a 401(k) to an IRA, direct rollover is typically best. This means your former employer will provide a check payable directly to your new institution with instructions on how to move funds over without creating any taxable distributions. Always double-check with the institution where your IRA resides to make sure this type of transfer will be accepted and make sure they don’t charge fees; also ensure you choose an IRA provider without hidden costs and meet age 72 in order to take required minimum distributions (RMDs), as your former company may not allow this option post-leap.
Investment options
An IRA provides more control of your savings, with no fees brokerage accounts and low-cost index funds and ETFs tailored to your asset allocation or automated portfolio management services to manage it for you.
Keep in mind, though, that withdrawing funds before age 55 could incur a 10% early withdrawal penalty. To minimize this penalty and preserve company stock investments within your IRA plan for retirement purposes.
IRAs also provide more flexible beneficiary choices than 401(k)s, depending on the type of IRA you own. You may name multiple or contingent beneficiaries and even set up trusts, making estate planning simpler. Furthermore, moving your IRA into a Roth IRA allows tax-free withdrawals upon retirement; however this strategy should only be pursued after consulting with an expert CPA.
Choices
When rolling over your 401(k) into an IRA, there are many choices available to you for where to invest the money. Be careful transferring it directly into your bank account as doing so could incur income taxes and penalties.
Avoid being lured into moving your 401(k) funds to your current employer’s plan. Doing this requires your former employer to send you a check made out directly to you, which must then be deposited within 60 days into an alternate tax-advantaged retirement account.
Direct rollover is an efficient and straightforward method for moving funds from your 401(k) into an IRA, making the transfer easy and online. Select a brokerage firm with low-cost mutual funds or ETFs; consult with a financial planner; or select an automated advisor like Bankrate’s Robo-advisor option that manages money on your behalf – before making your choice, consult your IRA provider first!
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