What Accounts Can I Roll My 401k Into?
Individual Retirement Accounts, or IRAs, are independent from employer plans and often offer more investment choices than those available through workplace plans. Some IRA providers even have lower expense ratios.
Rolling your 401(k) into an IRA makes your funds tax-deferred1, or opening an account with a robo-advisor offers low-cost investment management that enables you to meet your retirement goals more effectively.
1. Traditional IRA
If your 401k contains pre-tax dollars that don’t need to be distributed as RMDs upon reaching age 70 1/2, rolling the account over into a Traditional IRA may make sense. When doing this, make sure that funds go directly into the Traditional IRA instead of arriving as checks payable directly to you as this indirect rollover may incur income taxes and penalties.
IRAs typically boast lower management fees than employer-sponsored retirement plans and provide access to more investment options such as low-cost mutual funds and ETFs.
Keep in mind that only one IRA can be converted to another within any 12-month period, so if your investments and fees are satisfactory then leaving it where it is may make more sense than moving your assets over. But if your employer offers better or lower-cost alternatives this could be sufficient reason for moving them over.
2. Roth IRA
Many individuals choose to move their 401k assets into an IRA to take advantage of its tax-friendly environment when reaching retirement age, however there are certain considerations you must keep in mind before making this move. First and foremost is to consult with your employer regarding partial rollover rules; some plans only permit all or nothing rollovers. You will then want to verify with the IRS whether funds can be transferred into a Roth IRA account.
As much as possible, direct rollover is ideal to avoid immediate taxation or penalties. An indirect rollover can be more complicated as your employer will usually withhold taxes from any pre-tax amounts you receive in check form and therefore the money must come from somewhere else to complete this rollover – though not impossible; just take extreme caution in doing it.
If you want to protect against outliving your retirement savings, an annuity could be a smart way to go. Just remember that all annuities have funding thresholds; your 401(k) should support annuity transfers to prevent surrender charges, taxes or IRS penalties from accruing.
There are various kinds of annuities, such as fixed annuities that provide a steady interest rate or variable annuities that offer potentially higher returns by linking earnings with stocks or other investments. But annuities generally offer lower growth rates compared to other investment accounts found within retirement plans.
Importantly, rolling over an IRA or 401(k) into an annuity typically involves direct transfers – meaning the financial institution overseeing your 401(k) handles this process on your behalf, only needing you to fill out forms and provide approval. This method may provide a more efficient means of transitioning an existing account.
4. Money market account
Money market accounts combine the best features of both savings and checking accounts. They typically pay higher interest than regular savings accounts and give access to more funds than certificate of deposits (CD). Furthermore, money held in either account is protected up to federal limits by either FDIC or NCUA insurance coverage – depending on where it resides.
Some money market accounts provide checks or debit cards, limiting withdrawals to six per month for ease of withdrawals. Also be sure to find out if they charge fees per transaction.
Before making your decision to convert your 401k into a money market account, consider how it fits with your goals. For instance, if saving for long-term expenses like retirement might require higher returns and potential tax breaks – something NerdWallet’s free Savings Calculator can assist with.