Can You Transfer Your 401(k) Into an IRA Without Getting Penalized?

There are various options for managing a 401(k) rollover, so it’s wise to speak to your financial advisor to find one that might best meet your needs.

Your options for moving it include leaving it with your old employer, switching it over to a different retirement plan or moving it directly into an IRA (this option often saves money in fees).

Keep Your Pre-Tax Earnings

Rolling your old 401(k) into an IRA allows you to keep all the pre-tax earnings. Any withdrawals from this new account will be taxed as regular income instead of at lower rates as was the case when working.

Direct Rollover to an IRA You can conduct a direct rollover by asking your former employer for a check made payable to the new account provider and specifying where you would like it sent, then deposit it within 60 days into your IRA to avoid penalties.

If you miss this window, a 10% early distribution penalty may apply. Therefore, it’s advisable to consult with your CPA and plan administrator prior to taking any actions with regard to an IRA account as there is no “rule of 55” provision, allowing early withdrawal penalty-free before age 59 1/2 for college tuition costs or unreimbursed expenses.

Keep Your Taxes Down

One major drawback of rolling over a 401(k) is the mandatory 20% tax withholding required of you when rolling it over to an IRA account. Furthermore, you need to understand that an IRA has its own set of account ownership rules and access privileges; unlike your former employer’s qualified plan. Your IRA assets belong solely to you and should not be subject to blackout periods where withdrawals limit access until contributions resume again.

Many people who work across different jobs may have multiple retirement accounts that need consolidating, and an IRA is an effective way to do just that. You also have more control over fees in an IRA than with most 401(k) plans – when comparing costs make sure to consider “expense ratios” and administrative costs when comparing plans – meaning you could find an IRA with lower fees than your old 401(k). Again, having a financial planner with you could prove invaluable here.

Keep Your Investment Options

Clients looking to roll over their 401(k) assets often opt for an IRA over another employer’s plan when rolling them over, as this provides greater investment choices and potentially reduced fees. Furthermore, clients can take advantage of special protection against creditors offered only through an IRA account.

As with all decisions, though, clients can give up some control of their money through direct rollover. Under such an arrangement, clients’ old employers must provide them with a check to forward to the institution where they’re rolling over funds – or face a taxable distribution with a 10% early withdrawal penalty if they’re under 59 1/2.

Sticking with their former employer’s plan may seem like an easy decision, but it’s crucial that individuals carefully consider all aspects of retirement savings before making their final choice. Be sure to consider expenses, availability of services and options, RMD planning strategies, creditor protection measures and any other relevant considerations before reaching a decision.

Keep Your Control

You have several options when it comes to leaving assets behind at your old employer’s plan: you could leave them behind and continue contributing or withdrawing; cash out, transfer into a new 401(k) plan (if allowed); cash out, or cash out altogether (whichever suits best).

Direct rollovers are usually the optimal choice, ensuring your funds flow seamlessly into an IRA without going through your hands and incurring taxes or penalties. Indirect rollovers can also work; just ensure it lands into an IRA within 60 days or it may trigger mandatory 20% withholding fees on its total amount.

If you need assistance making decisions, seek advice from a financial professional or CPA. Discussing goals and priorities may prove useful, along with their advantages and disadvantages of various options. Be sure to utilize NerdWallet’s rankings of brokers and robo-advisors so you can compare fees, investment choices, mobile app capabilities and more before selecting one to work with.


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