How Do I Rollover My 401k to an IRA Without Penalty?
Rolling over your 401(k) into an IRA may offer numerous advantages. IRAs tend to have lower fees than 401(k)s and offer you greater control over your retirement savings.
Rollovers work by having your old employer send a check directly to your new IRA provider with instructions for who it should be made out to and its contents (i.e. account number) of where it should go.
1. Contact Your Employer’s Plan Administrator
Your former employer’s retirement plan administrator should provide you with paperwork outlining your rollover options and provide direct rollover. Should you choose this route, funds will go straight from old provider into your new IRA without ever touching cash or changing hands; while an indirect rollover sends you a check with 20% withheld for taxes; in either case the IRS requires that it is deposited into a retirement account within 60 days or all distribution will become taxable.
Making the switch can simplify your financial life and make managing investments simpler, but before making this decision it is important to assess where you stand financially compared with where you expect to be in the future.
2. Request a Direct Rollover
As soon as you receive your money, ideally it should be transferred into a new account immediately to avoid taxes on its distribution when filing your return. In doing so, it also gives you an opportunity to explore all your IRA options, from online brokerages with low-cost investments and robo-advisors (robos can manage portfolios more cost effectively than financial advisors) through to traditional portfolio managers like mutual funds that provide services with minimal costs involved.
If you want to roll over funds from an old plan into an IRA, you have 60 days from when they arrive to deposit them or else income taxes and possible a 10% penalty will apply. A direct rollover is usually the easiest and best way forward: your new IRA provider will send a check payable directly to you with all of the balance from your old account along with instructions on how best to deposit it.
3. Get a Check Made Out to You
Once your IRA is prepared to accept its new rollover, the next step is getting your check from your 401(k). Your employer should send it directly to you; once received, you have 60 days to deposit it into the account or face federal taxes and penalties.
Each brokerage or robo-advisor has their own process for depositing, so be sure to do your research and understand exactly what they require from you. They may ask that a check be written directly to your IRA account number or address, so ensure you comply with their instructions exactly in order to avoid complications later on.
When considering an indirect rollover, be mindful that companies may withhold 20% from your distribution due to their assumption that you’ll cash out. To avoid additional tax complications, opt for direct transfers when possible; otherwise you will need extra funds in order to pay back 20% withheld – something which could seriously compromise your retirement savings plan.
4. Deposit the Check into Your New IRA
When opting for an indirect rollover, your former employer will issue you a check for the total distribution amount plus 20%. When depositing it into an IRA or old 401(k), ensure it arrives before 60 days are up otherwise the IRS could treat it as a taxable withdrawal and subject you to a 10% penalty if you’re under age 59 1/2.
Before depositing the check, it’s a smart idea to open an IRA at an institution that provides your desired investment options and features such as online interface and past experiences when choosing their partner institution.
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