Yes, partial rollovers from your 401k into an IRA are possible; however it’s essential that you understand all tax implications and fees involved before proceeding with this move.
Your financial institution that distributes your 401(k) distribution will send an IRS Form 1099-R with details on the gross amount and 20% withholding amount in Box 1, plus 60 day deadline for depositing it in Box 4. In order to avoid tax penalties.
Taxes
No matter how you roll over your retirement account, taxes must eventually be paid at some point. Because of this, partial rollovers should usually only be considered if it makes economic sense from a tax viewpoint.
If your former employer’s plan consists of only company stock or other investments not generally available to retail investors, you might want to keep some money in its 401(k) plan while rolling over the rest into an IRA in order to minimize exposure to ordinary income taxes while increasing opportunities for penalty-free withdrawals under Rule of 55.
Your 401(k) administrator will typically send the assets that you’re rolling over directly to the custodian of your new IRA. If it is made out to you directly, however, the IRS could consider this distribution and require 20% withholding; to prevent this situation from arising, consider having it sent directly.
Fees
Under partial rollover, an individual receives their distribution check from their former employer and then deposits it within 60 days into an IRA in order to avoid income taxes or early withdrawal penalties. All funds from their distribution must be redeposited, including amounts withheld for taxes.
Individuals may elect to do a partial rollover in order to streamline the number of retirement accounts they hold, making them simpler to oversee on an ongoing basis. Others might be dissatisfied with the limited investment options of their 401(k), prompting them to move some of the funds into an IRA with greater investment choices and flexibility – especially important if children or spouses will inherit it in future years.
Availability of Investments
If you opt for a partial rollover, be sure that your chosen IRA custodian provides an extensive investment menu featuring top-of-the-line investments. Many 401(k) plans provide only limited choice at high costs, which could affect how well it suits you.
Consider your current tax bracket versus where you anticipate being when retired; if you anticipate having lower tax obligations after retiring, a Roth IRA could make more sense than traditional IRA.
Keep in mind that a rollover may trigger a required minimum distribution if you are younger than 59 and a half, which could incur significant tax liabilities.
If you are considering a rollover, we highly suggest working with Capitalize who can manage all the complexities for free. They work directly with your 401(k) plan administrator to acquire funds on your behalf; any forms provided will still need to be filled out as necessary, however this process should go smoothly otherwise.
Time Frame
Some 401(k) plan holders opt to roll over only part of their retirement funds due to high fees charged by workplace plans or restricted investment choices available.
When conducting a partial rollover, it is crucial that the amount withdrawn and deposited back into an IRA within 60 days; otherwise it will be treated as a taxable event and could incur early withdrawal penalties.
At this stage, it is also crucial that any money transferred is going into an account that offers similar tax treatment. For instance, if your previous employer’s 401(k) was traditional and pre-tax, you’ll need to transfer it into a pre-tax IRA account.
An important point to keep in mind if you’re married is that any attempt at rolling over your 401(k) into an IRA without first getting permission from both of your partners will constitute a taxable distribution, incurring an early withdrawal penalty of 10% and count as part of their taxable distributions.
