IRAs often provide greater investment options at reduced fees compared to company 401(k) plans; however, it’s wise to consult a financial advisor prior to making any definitive decisions.
Betterment is one robo-advisor that manages rollover IRAs, creating customized portfolios based on your risk tolerance and retirement goals. Their funds feature low management fees while they rebalance automatically.
Traditional IRA
Traditional IRAs allow investors to defer paying taxes on investment earnings until retirement when their tax bracket should hopefully be lower. You can make tax-deductible contributions that could reduce taxable income now.
An Individual Retirement Account, or IRA, offers an expansive array of investments, from mutual funds and stocks to bonds. Furthermore, you have the option of using a robo-advisor who may offer lower fees than most employer plans.
When rolling over an IRA into a 401k, direct transfer is the quickest and most reliable method. Otherwise, income tax and an early withdrawal penalty of 10% could apply when required minimum distributions (RMDs) must begin after April 1 of the year following your 73rd birthday – potentially cutting into long-term returns. For more information, read NerdWallet’s article on the topic.
Roth IRA
Roth IRAs are tax-deferred accounts, meaning you pay taxes only on contributions, not earnings. To be eligible, however, your earned income must meet certain criteria such as salary, hourly wages, tips commissions or self-employment income – unearned income such as investments income Social Security benefits unemployment compensation alimony or child support do not count towards qualifying.
Most 401(k) plans typically offer limited investment choices that are selected and provided through one financial provider, while rolling over into an IRA can often open up greater investment choices; including individual stocks, mutual funds and exchange-traded funds as potential investments. Furthermore, an IRA custodian may allow multiple and contingent beneficiaries to be designated – something not always possible with a 401(k).
However, it is wise to consult a financial professional before opting to roll your retirement savings into an IRA. Fees, investment options, creditor protection measures and RMD rules all need to be carefully evaluated when making this decision.
SEP IRA
Simplified Employee Pension Individual Retirement Account (SEP IRA) is a great retirement savings solution for small business owners and self-employed workers, enabling tax-deductible contributions for both yourself and employees that is straightforward to establish and administer. Annual contribution limits tend to be higher than with other employer plans and all contributions become instantly vested upon being made.
However, SEP IRAs come with some disadvantages. Contribution limits depend on aggregate employer contributions and may be restricted based on your company’s “top heavy” ratio. Furthermore, withdrawals before age 59 1/2 are taxable income subject to a 10% penalty; you can avoid this by rolling over funds directly or trustee-to-trustee transfer no later than 60 days post distribution (check the IRS’s IRA rollover chart for details). You may also transfer SIMPLE IRA funds without incurring penalty.
SIMPLE IRA
SIMPLE IRAs are traditional IRAs designed to enable employees to invest a portion of their salary prior to federal income tax and allow the investments to grow tax-deferred. Employees have access to Vanguard mutual funds and ETFs as investment options.
Employers can create SIMPLE IRA plans tailored specifically to the needs of their businesses. Employers have the option of eliminating or reducing prior year compensation requirements as well as current year compensation requirements without incurring additional participation requirements.
Employees elect their contributions during an annual election period. Their employers must match those contributions dollar for dollar up to 3% of their salary, and employees can roll their SIMPLE IRAs over into 401(k) plans once participating for two years but must abide by strict rules in order to avoid incurring a 25% penalty fee.