Can I Withdraw My 401k and Transfer it to an IRA?
A 401(k) is an investment account in which contributions accrue tax-deferred, while withdrawals made before age 59 1/2 may incur a 10% penalty fee.
Your options for withdrawing and investing your earnings include withdrawing it in one lump sum or rolling it over into an IRA or another provider, with proper tax planning helping to avoid taxes on its use.
Withdrawing Your 401k
A 401(k) is an employer-sponsored retirement savings account that allows employees to contribute pretax dollars. This reduces taxable income and allows them to save for retirement at much reduced taxation rates; however, money withdrawn after retirement will still be taxed at ordinary income rates.
As soon as you switch jobs, there are multiple options for what to do with your 401(k). You have three choices for dealing with it: leave it where it is; roll it over into your new employer’s 401(k) plan or an individual retirement account (IRA); or cash it out.
If you withdraw funds before reaching age 59 1/2, they are subject to taxes and a 10% penalty. To prevent this from occurring, consider having your plan administrator transfer them directly into an IRA within 60 days for direct rollover. This option can save tax and penalty costs.
Rolling Your 401k Over
Rolling your 401k over to an individual retirement account (IRA) is often the best solution, provided your new employer does not offer a better retirement plan. An IRA provides more investment options and beneficiary flexibility with lower fees compared to 401(k).
However, if you make the mistake of having your check made payable directly to you and depositing it yourself into an IRA yourself, the IRS will consider it taxable income and assess a 10 percent penalty. If in doubt as to your options or penalties associated with doing this yourself, speak with a tax professional for guidance.
When rolling your 401k over, follow the instructions from your IRA provider’s “Funding” or “Rollover Instructions” section of their website. They should contain detailed instructions on how and when to submit all necessary documentation – for instance the full legal name and tax ID number of the institution into which the money will be moved.
Leaving Your 401k With Your Former Employer
Leave Your Money Behind If you decide to keep your retirement savings in an employer-sponsored 401k plan, the tax benefits may still apply; however, more sophisticated investments and fees may be restricted or unavailable; working with a financial advisor will help determine if these additional costs outweigh their advantages in keeping retirement savings close at hand.
When switching employers, your 401k options include withdrawing its funds and paying any associated taxes or penalties; withdrawing them entirely to pay any potential taxes and penalties; rolling your distribution directly into an IRA account, moving into your new employer’s 401k plan or keeping both unchanged if allowed. Rolling your 401k directly to an IRA offers you greater control of your funds – our online process and team of experts make this simple for you; but be sure to weigh all options carefully before committing yourself too quickly as any has potentially costly ramifications awaiting.
Transferring Your 401k to an IRA
If your former employer’s 401(k) plan features high fees or limited investment options, it may be beneficial to roll your distributions over into an IRA instead. Just keep in mind that any distribution will need to be declared as income on your tax returns (unless you are aged 59 1/2 or above).
Rollovers typically involve transferring your IRA directly with its trustee and making payment to both yourself and your new IRA, with most of the 20% withheld being returned back into your taxable income rather than included as tax liability.
An Individual Retirement Account, or IRA, offers you more investment choices than a 401(k). Options might include mutual funds, exchange-traded funds and individual stocks and bonds – plus they often feature lower fees than 401(k) plans. It is best to consult a financial professional to determine what plan best meets your retirement goals as they can evaluate all available options to you.