A 401(k) to IRA rollover is a fairly straightforward process but can take up to a couple of weeks to complete. Before you start the rollover process, review the different tax implications and pros and cons of moving from one retirement account type to another.
To roll over your 401(k) to an IRA, you must choose an IRA account type and provider and initiate the rollover process with your old 401(k) provider. Here’s what each step entails.
When choosing an IRA type, note any potential tax implications. For instance, if you roll over your traditional 401(k) to a Roth IRA, you’ll have to pay income taxes the year you roll over the money. This is because a Roth IRA is a post-tax account in which you pay taxes on the money before you contribute versus when you begin taking withdrawals in retirement. The benefit is that when you withdraw the money in retirement, you won’t have to pay taxes on the qualified distributions
However, if you have a Roth 401(k) and roll your funds to a Roth IRA, you may not have to worry about paying any additional tax unless you have pre-tax employer contributions you’re rolling over.
Moving funds from a traditional 401(k) to a traditional IRA is not considered a taxable event if you complete the rollover within 60 days, according to IRS rules.
Not all IRA providers are designed alike — things like fees, investment options and other features and amenities differ from one bank or broker to the next. Whereas one broker may let you invest in a wide variety of assets, another may limit you to stocks and exchange-traded funds (ETFs).
Also, consider your investing approach as you compare providers. If you prefer to be hands-off, consider an IRA provider that offers automated investing using a robo-advisor.
The actual transfer of 401(k) funds can take up to a couple of weeks, depending on the provider. Usually, you can select a direct rollover option, where funds are transferred from your old employer’s 401(k) provider to your new IRA provider. An indirect rollover is when you receive a check for your distribution and have to deposit the money with your IRA provider.
The advantage of a direct rollover is that it’s simpler and avoids potential tax implications. If you choose an indirect rollover and fail to deposit the money within 60 days, the money is subject to taxes and an early withdrawal penalty if you’re younger than 59.5 years old. Some 401(k) plan administrators automatically issue a check if your balance is below $1,000. This money incurs a 20% income tax withholding, and you’ll need to deposit the funds into an IRA within 60 days to avoid any early withdrawal penalties.
If you choose a direct rollover option, your 401(k) plan administrator automatically deposits your money with your new IRA provider. If you choose an indirect rollover, deposit the money within 60 days to avoid taxes and penalties.
Depositing or transferring funds into your IRA doesn’t mean these funds are invested. Unless you choose an IRA that offers managed portfolios, you’ll need to choose your own investments. If you’re unsure how to start investing, consider your time horizon, risk tolerance and investing goals when deciding which investments are right for you.
Rolling over a 401(k) to an IRA has different advantages and disadvantages.
At the end of the day, transferring funds from your 401(k) to an IRA can be helpful if you wish to have more investment choices and potentially lower fees. If you find that your 401(k)’s creditor protections, loan options and investment choices align more with your goals, you may want to hold off.
It’s worth noting that your rollover does not affect your total IRA contribution amounts. For example, the IRA contribution limit is $7,000 and another $1,000 if you’re age 50 and older. If you roll over a $5,000 401(k) balance to your IRA, it won’t count toward your contribution limit.
A 401(k) rollover to an IRA is a straightforward process. But because of potential tax implications, it’s a good idea to roll your 401(k) over to an IRA of the same type. Review the best IRAs and best Roth IRAs to see which IRA provider is right for you.
Yes, you can roll over a 401(k) into an IRA without penalties if you complete the rollover within 60 days.
Yes, you can roll over a 401(k) to an IRA tax-free. If you transfer funds from a traditional 401(k) to a traditional IRA, you will not have to pay taxes again.
The easiest way to roll over a 401(k) into an IRA is through a direct rollover, where your old 401(k) provider transfers your funds directly to your IRA.
You need to check with your new 401(k) provider to see if they will accept your old 401(k). If they do, initiate the 401(k) rollover with your old provider.
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