Rolling your 401(k) balance over to your new employer’s plan is usually the simplest and least complex option available, while you could also transfer the funds into a traditional IRA account.
To avoid additional taxes and penalties, be sure to follow some key guidelines found within your plan’s documentation.
IRA
IRAs allow you to invest in various securities, such as stocks, bonds, real estate, private equities and crypto. Self-employed individuals can also open SEP and SIMPLE IRA accounts; however, liquidating an account could put them in a higher tax bracket.
An ideal method for transferring an IRA is via direct rollover. Your IRA sponsor will issue you with a check, which you deposit into the new account of your choice without incurring taxes or penalties.
Before initiating a direct transfer, you must select a bank that specializes in IRAs. Be sure they accept an extensive range of assets within an IRA account as well as having an accessible investment platform. In addition, choose a broker or robo-advisor with low costs but superior investor services; although the transfer may take some time. It will pay dividends down the road!
Brokerage or robo-advisor
Brokerage firms and robo-advisors offer ideal options for rolling over your 401(k). Both offer low fees while providing access to diversified portfolios at reasonable costs. Furthermore, both have various account types available including tax-advantaged individual retirement accounts (IRAs). You also have access to low-cost index fund ETFs which could help diversify your investments further.
Robo-advisors utilize algorithms to select and rebalance investments based on your investing goals and risk tolerance, with access to human financial advisors for those who prefer personal interaction.
Some robo-advisors provide free introductory plans, while others charge a management fee of 0.21% or less. Their portfolios generally consist of low-cost index funds as well as real estate investment trusts and socially responsible stocks – or themed portfolios tailored specifically towards retirees. Furthermore, the top robo-advisors provide security features like two-factor authentication or cybersecurity technology to protect investors.
Bank account
When changing jobs, it’s essential to understand your 401(k) transfer options. Your options could include keeping the funds with the old employer’s plan; rolling it over into another plan at your new workplace; or opening an IRA (individual retirement account). If you cash out your 401(k), however, taxes and an early withdrawal penalty of 10% must be paid; in addition to possible state/local income tax liabilities.
To best manage your money, select a bank account with low fees. An FDIC or NCUA-insured institution with online bill pay capability and transfer capabilities are ideal options, while emergency access to funds should arise. A Roth IRA funded with post-tax contributions can also provide more options to increase retirement investments – however it’s essential that each option be carefully evaluated in terms of its advantages and disadvantages before making your choice.
Loan
One option for rolling over money from your old 401(k) into an IRA is the most beneficial, as this enables you to more easily track your investments and access thousands of low-cost mutual funds. Another approach might be cashing out your retirement account; this, however, may incur taxes and an early withdrawal penalty of 10%.
If you move the money to an IRA, if your annual contribution limit hasn’t been reached yet you may still add more. Otherwise, funds can be transferred directly into your bank account for later investment in mutual funds or brokerage accounts. It is important that before making any decisions on moving over money that you check your new employer’s 401(k) rules; most employers only allow up to $5,000 of rollover every year and any outstanding 401(k) loan balances must be paid within 60 days.
