-If you are self-employed, you may have used a self-employed 401k as one of the ways that you saved for retirement. The self-employed 401k is one of the best options available because it allows you to maximize the amount that you contribute to retirement each year. However, if you are no longer self-employed or if your business has grown, you may no longer qualify to continue contributing to a self-employed 401k, and you may want to roll it over into an IRA so that you have more control over the investments. Lack of control is one of the main reasons that household investors engage in self-employed 401k rollovers.
Rules for Self-Employed 401k Rollovers
There are strict guidelines surrounding a self-employed 401k, and you must meet all of them in order to qualify to contribute to such a plan. However, if you do qualify, this is a good option because of the amounts that you are able to contribute to the 401k each year.
- You must be self-employed with no employees to qualify for a self-employed 401k. If you have employees, you must look for a different retirement saving account option.
- You can contribute up $16,5000 each year. The business you are running can contribute up to 25% of your income with a maximum of $49,000, in addition to your personal contribution.
- Your spouse can contribute as long as he or she is working with you in the business.
- You can determine how much you contribute each year. This means if you have a slow year, you can cut back on contributions.
- An investment firm will manage the 401k, and you simply make the contributions to the fund.
As you search for a place to open your self-employed 401k, it is important to read the rules regarding your 401k. Each plan sets up different guidelines for early withdrawals and qualifying for 401k loans. Additionally, the fees and administrative costs can vary widely. You will want to find a plan with low fees and favorable terms.
Reasons for Self-Employed 401k Rollovers
You can rollover your self-employed 401k into an IRA. You can complete a rollover when you are no longer contributing to the 401k. The process is fairly straightforward, but there are specific deadlines and guidelines that you must meet to avoid incurring any taxes and penalties on the money.
There are a few reasons that you may choose to roll your 401k over into an IRA. You generally cannot rollover the money in an account that you are still contributing to, and so you will need to consider other contribution options if you choose to roll your 401k over.
- You no longer qualify to contribute to a self-employed 401k because your business has grown or you have taken a job somewhere.
- You want more control over your investments.
- You want to consolidate your retirement savings into one account to make managing it easier.
Account Options for your Self-Employed 401k Rollover
There are a number of different options available when you open an IRA. First, you will need to choose between a traditional IRA and Roth IRA. Both accounts have tax benefits, but they are different. The traditional IRA allows your contributions to be made tax free, which means you can deduct them on your taxes. However, you will be taxed on your withdrawals. The Roth IRA requires you to pay taxes on your contributions, but you will not pay taxes on your withdrawals. This option saves you money over the long term. You also have the option of choosing where you open your IRA, which can affect the types of investments you make.
- Self-Directed IRA: You can open this at an investment firm that specializes in self-directed IRAs. This option gives you more investing options like the ability to invest in property or gold.
- Investment Firm: You can open an IRA at a traditional investment firm that specializes in mutual funds and stocks. You will be able to choose a mutual fund but have little control over the investments other than that.
- Banks or Credit Unions: A bank or credit union will put your money into a Certificate of Deposit (CD). The money is guaranteed by the FDIC for up to $250,000. CDs are widely heralded as “safe” investments, but they tend to have the lowest standardized rate of return among retirement account investments and may not be able to keep pace with inflation.
Steps to Complete a Self-Employed 401k Rollover
Once you have decided to roll your 401k over, the process to do so is fairly simple. However, you need to make sure that you complete the process within 60 days to avoid any taxes or penalties on the transaction.
- Contact your 401k plan’s administrator to request the paperwork to roll your 401k over. Fill out and submit the paper work.
- Open the IRA at your chosen investment firm or bank. They may be willing to help you fill out the paperwork and have the check mailed directly to the account you opened.
- Deposit the proceeds from your 401k into your new IRA within sixty days.
If you plan on rolling a traditional 401k into a Roth IRA, you will need to be prepared to pay the taxes on the amount that you are rolling over. If you take the money out of the 401k to do that, you will also need to pay the early 401k withdrawal penalty. If you do not have the money available to pay the taxes right now, it may be better to roll a traditional 401k into a traditional IRA. If you roll a Roth 401k into a traditional IRA, you will be taxed on the money twice, and you should never do this.
Self-Employed 401k Rollovers: Taxes and Penalties to Avoid
If you complete the 401k rollover process correctly, you will not face any withdrawal penalties or pay taxes on your withdrawal. The withdrawal penalty is 10% of the amount that you withdraw. You will also be responsible to pay taxes on the money at your current tax rate. It can be tricky because the withdrawal may bump you into a higher tax bracket. If you do a withdrawal or miss a deadline, you should consult with your accountant to make sure that you set aside enough money for the penalty and taxes.
Finding the Right IRA for your Self-Employed 401k Rollover
As you begin the process of rolling your 401k into an IRA, it is important to choose the right IRA for your needs. There are a variety of options of available and it can help to talk it over with a professional before you make any decisions about the type of IRA or choose the firm you want to use. You can find a professional in your area by contact us.