A Rollover IRA refers to a type of account that enables individuals to shift funds from their previous employer-sponsored retirement plan into an IRA. A Rollover IRA offers a multitude of investment choices that generally meet their goals and risk tolerance.
An individual can preserve the tax-deferred status of his retirement assets with an IRA rollover without paying early withdrawal penalties or current taxes at the time of transfer. Furthermore, rollover IRAs don’t cap the amount of money you can roll over and allows you to invest in a wide range of assets such as ETFs, bonds, stocks, and mutual funds.
What Happens When You Leave Your Job?
Even when you leave your job, that 401(k) from your old employer remains your money. You can decide what to do with it. If an employee leaves it where it is, he can’t contribute any more to it if he leaves his job. When you switch jobs, you need to keep track of several old accounts. Even though numerous employers provide at least a part of your 401 (k) plan’s administration fee, they can stop doing it if you leave.
You can also choose to cash it out, but collecting this money can come with substantial tax penalties. A 401(k) rollover seems to be the best choice when you weigh these options.
What Is A 401(K) Rollover?
As mentioned, when you roll over a 401(k) account, it means that you transfer the money into another tax-advantaged retirement account. The two most popular types are an individual retirement account (IRA) or your new employer’s 401(k). To know how to go about the process, here is how you can complete the different steps involved.
Select the Type of IRA Account You Wish To Open
- The rollover IRA route offers lower fees and more investment options than your old 401(k) provided
- You owe taxes on the rolled amount if you decide to roll over to a Roth IRA
- Rolling over to a traditional IRA means deferment of your taxes
- You won’t owe taxes if you roll over to a Roth IRA from a Roth 401(k)
Open Your New IRA Account
- Generally, there are two options: a robo-advisor or an online broker.
- Choose an online broker if you intend to manage your investments yourself.
- A robo-advisor is a wise choice if you want someone else to manage your investments.
Request Your 401(K) Plan for a Direct Rollover
When we say a ‘direct rollover,’ we mean that the 401(k) plan will not cut a check to you personally but directly to your new IRA account.
Here are the steps involved:
It would help if you got in touch with your former employer’s plan administrator. You will have to fill out and complete a few forms and wire your account balance or send a check to your new account provider.
Your new account provider will provide instructions to wire the money or send the check and detail all the information you must include.
You can also choose an indirect rollover, which implies that you make a withdrawal and hand the money to the IRA provider. However, the process can lead to tax complexities. Hence, financial advisors usually recommend a direct rollover.
Select Your Rollover IRA Investments
As soon as you get the money in your new IRA account, choose your investments. ETF’s or low-cost index mutual funds are the most common types of investments. Some people also select bonds and individual stocks. However, these options are best for experienced investors.
In case you opened your new account at a robo-advisor, you will get the answers to your questions based on the company’s algorithms.
The Right Way to Do an IRA Rollover
When you move your retirement plan assets via a direct rollover, you can avoid having 20% of your transferred assets withheld by the IRS or the Internal Revenue Service. Moreover, you can also use move assets through an indirect rollover and take possession of the plan assets to shift assets through an indirect rollover. In this process, the employee takes possession of the plan assets to move them into another retirement plan within 60 days.
An employer usually withholds 20% of the pending transfer amount to pay the taxes due in an indirect rollover. When the rollover process is complete, the amount is returned as a tax credit for the year. You must deposit the funds into the new IRA within 60 days to avoid a tax penalty and pay income tax on the amount.
The money can be used for any purpose, as soon as it reaches the account holder, for the full 60-day grace period. In case an individual fails to deposit the money in another tax-deferred account, you will have to pay a 10% early withdrawal penalty. The entire balance is subject to tax, assuming that you are under the age of 59-1/2.
What Else To Know About Rollover IRA
It is common for people to consider rolling over their 401(k) savings into an IRA at the time of switching jobs. This is the ideal time to move funds for many people because they can consolidate various retirement accounts from old employers in a single place and benefit from more investment options.
If you are leaving your employer, you have the following 401(k) options:
- If permitted, leave the money in your ex-employer’s plan.
- Rollover to an IRA
- Roll over the assets to your new employer’s plan, if allowed.
- Cash-out the account value
Remember, leaving your employer is not the only time to move your 401(k) savings. Sometimes, you can rollover your 401(k) assets even when working and making further contributions to your company plan.
Not only these rollovers can help you successfully manage your retirement savings, but it can also diversify your investment portfolio. But remember to consider the pros and cons of this decision. You will also have to check whether you are eligible because not every 401(k) plan will permit you to roll over your 401(k) while you are still working.