There are many reasons to perform a 401(k) rollover to an IRA. Whether you are trying to improve your tax situation later on with the help of a Roth IRA, or whether you have changed employers (or left the rat race altogether), it’s worthing considering rolling over your 401(k).
401(k) to IRA Rollover
Anyone can roll a 401(k) into an IRA. However, if you plan to roll your 401(k) into a Roth IRA, you will need to be aware of the tax consequences. Since your 401(k) is a tax-deferred account, you have received a tax deduction on your contributions. The Roth IRA, though, grows tax-free, and contributions are made after you have paid taxes on your income. Therefore, when you perform a 401(k) rollover to a Roth IRA, you will need to pay taxes on the amount you move.
Once you understand the implications of your rollover, you can proceed. Here are the two steps you need to follow if you want to complete a rollover — no matter the reason:
- Open an IRA: Before you begin the rollover process, you need to have a place to put the money. You need to open an IRA. The good news is that this is fairly easy to do. Most of the best stock brokers offer IRAs. So, open the account and fund it with the required minimum.
- Contact the 401(k) administrator: Now that you have a place to move your money, you should contact the 401(k) administrator. You’ll want to do a direct transfer of money from the 401(k) into the IRA. You can avoid a lot of confusion with the IRS (and the penalties for early withdrawal) if you do a direct transfer.
Make sure you understand all of the information that is needed before you contact the 401(k) administrator. Most likely, you will need your own contact information, and some sort of proof of identity. You will also need to provide information on the new brokerage, including the IRA account number and the brokerage’s routing number. When asked, make sure that you specify that the distribution should be labeled a “rollover.”
In some cases, the 401(k) administrator will send you a check for a distribution. It’s important to get that money into your IRA as soon as possible. You have 60 days to move the money to roll it into your IRA. If you are offered the option as you add funds to your IRA, make sure that you choose “rollover” contribution. This creates a paper trail that is easier for the IRS to follow come tax time. If you wait longer than 60 days, you will have to pay a 10% penalty on top of your regular income tax on the distribution.
Advantages of a 401(k) Rollover
There are advantages associated with a 401(k) rollover. If you aren’t happy with the options offered by your employer’s plan, rolling into an IRA can be a smart move, since you will be able to take control of your investments.
Additionally, if you think that you will be subject to higher taxes during your retirement, you can rollover to a Roth IRA. You will have to pay taxes now, but your distributions later will be tax-free. And you won’t have to worry about RMDs with a Roth IRA.
Carefully consider your situation. It may be that a 401(k) rollover is right for you.