Rollover from 401(k) to IRA can offer many advantages, including lower fees and greater investment options, while offering stronger protection from creditors. However, certain requirements must first be fulfilled for the indirect rollover to work effectively.
Direct rollovers are preferred since the plan administrator will send funds directly to your new custodian without you ever touching any funds yourself, while indirect transfers may result in a taxable distribution.
1. Check with your employer’s plan
Consider your cost (find a broker with no trading commissions and minimal or no other fees, such as custodian fees for an IRA), investment options available through each account type and personal circumstances when making this decision. Moving some stocks from your 401(k) account could leave any unrealized gains unrealized unless tax is payable – therefore leaving behind potential gains that will have to be taxed as realized gain rather than unrealized loss behind in their original position.
Direct rollover is the safest method of asset transfer. A plan administrator cuts a check directly from one account to the next without your direct involvement, helping avoid taxes and penalties that come with withdrawing before age 59 1/2. Indirect rollover is another popular approach where former employers send you checks which you deposit into an IRA account yourself.
2. Check with the financial institution managing your 401k
Your plan administrator of an old 401(k) may transfer funds directly into an IRA account; however, more often they send you a check which you deposit with another financial institution.
Contacting the provider and inquiring will likely provide the most accurate answer on whether a direct rollover option exists for your plan. They should be able to explain exactly which information must be included with your request, how it will be sent and whether there are any special requirements that must be fulfilled before initiating one.
Once that has been accomplished, your next step should be finding an IRA provider with low fees, an extensive range of investments and excellent customer service. Some providers even offer zero trading commissions while others waive custodian fees on certain investment accounts. Furthermore, they may provide automated advice from robo-advisors which can manage investments for you at much less expense than human financial advisors.
3. Open an IRA with the financial institution
When it comes to your retirement savings, you have three choices for where you should put the money: leave it where it is; cash out or rollover into an IRA. Most people find it more advantageous to convert their 401(k) plan into an IRA as this allows them to consolidate funds more easily as well as often offering more investment choices with lower management and administration fees compared with a 401(k).
Custodians also provide helpful resources to make managing an IRA easy, such as online trading platforms or robo-advisors that make managing it accessible even for novice investors. These tools make managing an IRA much simpler!
Additionally, some financial institutions offer incentives like free stock trades as an extra perk of doing business with them. Though these rewards shouldn’t be your sole consideration when selecting your provider, keep an eye out for any that pop up – they could come in handy!
4. Send a check to the financial institution
If you want to keep your money with the financial institution that manages your 401(k), consider opting for direct rollover. Your former employer should issue a check directly into your new account without tax withholdings being withheld; you have 60 days from receiving that check to deposit them into an IRA account to avoid taxes and penalties.
Financial institutions managing your IRA will play a key role in determining investment options and fees, so be sure to do some research on them to see which are available as well as competitive fees; choosing one with lower costs could pay dividends over time.
Consider also what services the financial institution provides, such as access to institutional-class funds and asset allocation strategies. Robo-advisors could also be an option that offers low cost investment management if desired. If unsure, always consult your advisor.