Rollover distributions from most employer retirement plans into an IRA without incurring taxes if completed properly, including your 401k, 403b and 457 plans as well as those from previous jobs or IRA accounts that you may hold.
Consolidating investments and saving on administration fees are among the advantages of moving money between accounts, but before doing so it is important to keep several considerations in mind.
1. Direct Rollover
Direct rollover is the fastest and simplest way to move retirement funds between accounts, involving asking your plan provider to transfer distributions directly into your new IRA custodian, either electronically or by sending a check directly.
If you opt for direct rollover, any initial distribution will be subject to mandatory 20% federal withholding tax withholding and must be redeposited into an IRA within 60 days or face income taxes and possible early withdrawal penalties.
Indirect rollovers involve receiving a check and depositing it directly into your own bank account before rolling it over. This method is less risky but more complex – tracking how you received the funds is key for keeping accurate records to avoid mistakes, so consult a financial advisor when choosing this route.
2. Indirect Rollover
Indirect rollovers involve moving funds between retirement accounts via direct and indirect methods. Your current account administrator will send your distribution via check or direct deposit into your new one; they must withhold 20% for federal income tax purposes though and add it back in by March 15. Otherwise you risk incurring penalties from the IRS.
Your distribution must be deposited into a new IRA within 60 days or it will be taxed and penalized, known as the 60-Day Rule.
While direct rollovers may be most appropriate in most circumstances, indirect ones may also be appropriate in some situations. Our financial advisors are here to help you evaluate both options and find the optimal one for your unique circumstances – schedule an appointment now!
3. Partial Rollover
As soon as you leave a job, you have two options for how you’d like your retirement savings rolled over – into either an employer plan or individual retirement account (IRA). Rollover allows you to reduce management fees and investment choices that could harm returns; plus it prevents potential required minimum distributions and tax penalties that can arise at age 59.5.
Direct rollovers offer the safest solution, as you transfer assets directly from one custodian to the other without losing control over them. Indirect rollovers, where funds are withheld for taxes before being deposited in an IRA account later, can also be risky; any financial institution providing funds must withhold 20% for taxes before depositing your entire sum within 60 days or face income taxes and an early withdrawal penalty of 10%.
4. Partial Cash Out
When leaving a job, you can decide between leaving your retirement savings with the old plan (if permitted), rolling them over into your new employer’s 401(k), or depositing them directly into an IRA within 60 days – typically without incurring taxes or penalties from income taxes and penalties.
Rolling your 401(k) over into an IRA offers numerous advantages, including increased flexibility, greater investment options and tax benefits that would not otherwise exist with most employer plans that typically offer more restricted plans with high management fees.
When making the switch from your 401(k), make sure that the IRA provider offers low fees and no minimum balance requirements. Consult a financial advisor for advice; SmartAsset experts can assist in managing IRAs and other retirement accounts efficiently – get in touch now for your free consultation session.
