Rollovers involve moving pre-tax savings from one retirement account to another without incurring taxes; an ideal approach would be a direct rollover; in this instance, your previous employer would send the funds directly over instead of holding back 20% for potential tax liabilities.
Your investments will expand, with lower fees and easier access to a financial advisor.
1. Taxes
Many employees change jobs frequently during their career, leaving them with multiple 401(k) accounts at different companies. It may make sense to roll these funds over into an IRA so as to consolidate your retirement assets and access more investment options.
Tax implications must always be kept in mind before moving money from a 401k into an IRA. A direct rollover transfers funds directly from your old plan into your new IRA – this is often considered the easiest option; with indirect rollovers typically requiring your employer to send you a check which must be deposited within 60 days or it becomes taxable distributions.
Before moving pre-tax or Roth money, it is also necessary to determine your eligibility for certain IRA investments.
2. Fees
Rolling over a 401k into an IRA can help eliminate early withdrawal penalties while opening up more investment options – however it is essential that you carefully consider all fees associated with it to make sure that your money is working as hard as it possibly can for you.
Investment fees can erode returns over time, so it is critical that when comparing account options you carefully compare costs when evaluating them. Look out for administrative, fund and transaction fees as you evaluate potential providers.
Bankrate recommends searching out brokerage options and no-load mutual funds to find an IRA provider with low fees, although depending on your personal preferences you could also opt to work with a robo-advisor to handle this task for you.
3. Eligibility
IRAs typically offer more investment choices and have looser withdrawal restrictions than employer-sponsored retirement plans.
Selecting an IRA provider carefully is paramount for avoiding unnecessary taxes and penalties. Furthermore, selecting an effective method of transfer such as direct rollover or trustee-to-trustee transfer should help to keep funds out of your hands.
When taking an eligible rollover distribution from a 401(k) or other retirement plan, the IRS withholds 20% of any taxable amounts until you request otherwise. Within 60 days after receiving this distribution you must replace it in full by direct rollover to avoid incurring income tax and possible penalties.
4. Investment options
Rolling your 401(k) into an IRA gives you access to more investment options; this may be particularly helpful if your employer plan provides limited selections or you’d like to diversify your portfolio.
IRAs generally feature lower fees than 401(k) plans, enabling more money for your retirement savings.
Assuming you know something about investing (though robo-advisors can design a portfolio for you), having multiple investment options may require some knowledge of investing (though robo-advisors may help design one). When selecting investments for long-term growth, market pullbacks and stock price declines present opportunities to invest for long-term gains. Individual Retirement Accounts allow investors to select products tailored specifically to meet their profile and risk tolerance while providers should offer incentives if you switch providers.
5. Choices
Rollover IRAs typically provide lower costs, more investment choices and increased flexibility – including being able to invest in employer stock. Some brokerage firms even provide cash incentives as an added incentive.
But if your employment situation doesn’t look to change soon, keeping your retirement savings where they’re working could be wiser. Consulting with a financial planner will help you understand all your options and determine whether a rollover would make sense for you.
Keep your retirement accounts in one place to make them easier to manage and monitor your progress towards reaching your goals. It is especially crucial as you approach retirement age and must start taking required minimum distributions* Don’t forget the tax deductions available as well!
