Can You Do a Partial Rollover From a 401k to an IRA?
Many individuals change jobs and need to transfer their retirement accounts. Doing a partial rollover may also help simplify matters; however, doing so may pose certain disadvantages.
Ideal, money should be transferred directly from one account to the other through what’s known as a trustee-to-trustee transfer in order to avoid taxes.
Taxes
Individuals contemplating a partial rollover from their 401(k) to an IRA should seek guidance from a financial professional regarding any tax implications of doing so, particularly those who hold employer stock which has increased in value since these assets fall under distinct rules for net unrealized appreciation (NUA) that could lead to significant taxes due to rolling them over into an IRA.
Direct rollover is usually the optimal method for moving a 401(k) to an IRA account, as this allows plan administrators to send your distribution directly to your new IRA provider; then they make payable directly to you as custodian. Direct rollovers often bypass tax withholding by making payments directly, though doing so may mean forgoing some investment options or fees associated with your previous workplace retirement plan as well as potential extra contributions being disallowed.
Fees
When considering partial rollovers, there are a few key elements to keep in mind. For instance, IRAs typically provide greater investment options than employer-sponsored plans while fees tend to be lower, meaning your total costs may be less compared to your former plan.
Your federal income tax withholding will also decrease by using direct rollover to your new account; however, make sure the funds are re-deposited within 60 days or you’ll face taxes and penalties.
When moving retirement assets between accounts with similar tax treatments, such as pre-tax 401(k) to pre-tax IRA accounts, no taxes are levied by the IRS. Be wary when shifting pre-tax dollars to post-tax accounts as this would trigger taxation at your ordinary income rate and may also qualify for net unrealized appreciation tax treatment from company stock contributions made after-tax.
Investment options
Rolling your retirement funds from one employer to the next can be an excellent strategy, but partial rollovers must be carefully executed. If you move pre-tax balances from traditional workplace retirement accounts into post-tax Roth IRAs, their entire distribution will be subject to taxes including net unrealized appreciation (NUA) on employer stock as well as early withdrawal penalties.
Consider both your options when considering whether an IRA rollover would make sense for you. While IRAs often feature lower fees and wider investment choices than 401(k)s, they may offer less tax-deferred growth1. Working with an Ameriprise financial advisor will help you evaluate these advantages and drawbacks to determine whether such a transition would make sense for you.
IRAs provide less creditor protection than their federally protected 401(k) counterparts and cannot be used as loans against. Therefore, direct rollover into an IRA could be the ideal solution if you wish to streamline recordkeeping. But keep in mind that any such conversion won’t allow loans from within an IRA either.
Convenience
If you are managing multiple retirement accounts from previous employers, consolidating all 401k-type plans into an IRA can make managing them simpler and potentially reduce fees on an ongoing basis.
However, if your former employer’s plan provides investment options that cannot be replicated within an IRA, keeping some money there could be beneficial. Furthermore, some 401(k) plans offer penalty-free withdrawals at age 55 which would not be available through an IRA.
If you are considering partial rollover from your 401k to an IRA, it is advisable to speak to a financial expert first before making any decisions. Any taxable portions will be reported back to the IRS on Form 1099-R in Boxes 1 and 4, providing them with sufficient details of any distribution that must be withheld from taxes due.
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