When you change jobs, you may want to roll your current 401k over into an IRA. When you choose an IRA, you have more control over where the money is invested. It also makes it easier to keep track of all of your retirement accounts, if you roll your 401ks into one combined IRA each time that you change jobs. Use this guide for the 401k rollover process to help you make the best choice.
Choosing the Type of IRA for your 401k Rollover
Once you choose to make a 401k rollover, the first step in the 401k rollover process is to choose the type of IRA for the rollover. There are 401k tax implications depending on the type of accounts you have, and you may end up paying taxes on your rollover if you choose the wrong type for your situation. The 401k rollover process you need will depend on which type of account you want to place your money.
- Roth IRA: A Roth IRA requires that you pay taxes on your contributions. However, the money grows tax-free and the withdrawals are not taxed. If you roll a traditional 401k into this type of account, you will need to be prepared to pay taxes on the amount you rollover.
- Traditional IRA: A traditional IRA allows you to deduct your contributions from your taxes. You will be taxed when you make the withdrawal.
The 401k rollover process is slightly easier when doing a straight rollover. That means if you have a traditional 401k, you roll it over into a traditional IRA. You’ll want to do a Roth 401k rollover into a Roth IRA, or you’ll pay taxes on the money twice.
401k Rollover Process: Choosing Where to Open an IRA
Once you have chosen between a traditional and a Roth IRA for your 401k rollover process, you will need to choose where you are going to open your IRA. Your choice will depend on the 401k rollover investments that you want to make and your research about the different options available.
- Investment Firm: When you choose an investment firm, the money from your IRA will go into a managed mutual fund. It is very similar to a 401k and you can choose a higher risk or more conservative investment strategy, but ultimately the control will be in the hands of the funds manager and fees may be much higher than with other retirement investment options.
- Bank or Credit Union: Banks and credit unions offer IRAs that are invested in Certificates of Deposit (CDs). The FDIC guarantees these funds for up to $250,000, but the rate of return is usually lower than the rate of inflation. This is the most conservative investing that you can do.
- Self-Directed IRA: Some firms offer a self-directed IRA investment options. This gives you the most control over your IRA, and allows you to invest in gold, rental property or stocks or a combination of the above. It allows you to diversify your retirement portfolio.
Understanding a Self-Directed IRA
A self-directed IRA will give you a checkbook that allows you to purchase the investments for your IRA. There are very strict rules about allowable transactions, and you need to learn more about this option before you open this type of IRA. The 401k rollover process is just as easy to complete but you do need to understand in which investments you can put your money. You are not allowed to buy from or sell to your self-directed IRA. The same rule applies to family members. You cannot live or vacation on the property that you purchase with the IRA. However, if you want to diversify your portfolio or choose the types of stock you want to include in your portfolio, then this option allows you the most freedom for your IRA.
Completing the 401k Rollover Process
The 401k rollover process can take some time, and once you receive the money, you have sixty days to complete the process without facing a penalty. The following steps are critical to your 401k rollover process to avoid taxes and penalties.
- Complete the 401k rollover forms to cash out your 401k or rollover your 401k. You can contact the company that is managing your 401k to get the paperwork. You can find the number on your 401k statement or by contacting your former employer to find out who manages your 401k.
- Contact the institution to open your IRA. Make your 401k rollover process as easy as possible by starting this step before you close your 401k account. This can speed up the process to make sure that you do not miss the deadline. When you open the IRA, you can choose the types of investments that you will use.
- Deposit the check from your 401k into your IRA account within sixty days to avoid any taxes and penalties.
Avoiding Taxes and Penalties in the 401k Rollover Process
When you complete the 401k rollover process, you should not face any withdrawal penalties or taxes if you complete the transaction within the sixty-day window. However, if you miss it by just one day, the IRS will consider it a withdrawal, and you will be expected to pay the ten percent penalty and taxes on the money at your current tax rate. Additionally, you will lose the benefit of being able to invest the money in tax sheltered retirement account, because this money will then count towards you annual IRA contribution limits. It is essential to meet the deadline to avoid the penalties. If you do miss the deadline, be sure to contact your accountant right away to start planning for any tax implications that you may have.
Traditional 401k to Roth IRA Rollover Process
If you want to change your traditional 401k to a Roth IRA, you will need to pay taxes on the money that you roll over. If you take the money out of your 401k, then you will also be charged a 401k withdrawal penalty. It is best if you can come up with the money for your taxes separately. Talk to an accountant before you complete this type of transaction to make sure you are setting aside enough in taxes this year.
Managing Your 401k Rollover Process
When you are ready to have more control over your older 401k plans, consider the 401k rollover process and the advantages of an IRA. You can contact us to learn more about opening an IRA. This will give you the opportunity to choose the type of investments and really diversify your portfolio.
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