401(k) plans and individual retirement accounts (IRAs) are both tax-advantaged retirements. However, they have important differences. 401(k)s are employer-sponsored and have limited investment options, whereas you open an IRA account through brokerage firms. IRAs provide many investment options and more control of your investments.
When you leave your job, you can leave your retirement funds in your previous employer's 401(k) or transfer the funds to your new employer's 401(k) or into an IRA via a 401(k) rollover. Or you can cash out your 401(k), which is not recommended for reasons discussed later.
What Is a 401(k) Rollover?
A 401(k) rollover is the transfer of funds from your 401(k) plan into another tax-advantaged retirement account, such as another 401(k) account, a traditional individual retirement account (IRA), or a Roth IRA.
A direct 401(k) rollover involves transferring funds from your 401(k) to the new retirement account. In an indirect rollover, your 401(k) provider writes your a check, and you deposit it into your new account.
How Many Times Can I Rollover My 401(k)?
The 401(k) rollover rules allow you only one indirect IRA rollover per 12-month period, even if you have multiple IRAs. However, there are no limits on the number of times you can do direct rollovers, IRA trustee-to-trustee transfers, and transfers from traditional to Roth IRAs.
Can I Rollover My 401(k) to an IRA?
A 401(k)-to-401(k) or 401(k)-to-IRA transfer has no tax consequences, but a rollover to a Roth IRA does. Doing a rollover into an IRA is advisable if
- Your new employer doesn't offer a 401(k) plan.
- Your previous employer discontinues your 401(k) plan.
- Your new employer's 401(k) plan has drawbacks, such as limited investments and unreasonable fees.
- You want access to a wide variety of investment options.
- You want more control over your investments.
As you do a 401(k)-to-IRA rollover, consider the downsides to an IRA rollover. The steps for an IRA rollover are as follows.
- Select a reliable and trustworthy broker.
- Consult your broker and 401(k) plan provider about the rollover process.
- Complete the paperwork.
- For an indirect rollover, deposit the funds into your IRA within 60 days.
- Select your investments.
Once you have your new IRA account in place, read up on the proper management of your IRA account and mistakes to avoid, such as trading too frequently and failing to designate beneficiaries.
Can I Rollover My 401(k) Anytime?
Simple as it may be, cashing out your account can be costly. You can ask your 401(k) plan administrator to write you a check. Just keep in mind that your employer withholds 20% of the amount to settle the taxes you owe. Furthermore, the IRS will likely apply penalties, and taxes may erode up to 50% of your funds.
Consider leaving your funds in your previous employer's 401(k) plan if they charge reasonable fees and offer good returns. However, keep in mind that you can't make additional contributions to it, and you may not be allowed to take a loan against the plan. Furthermore, some employers may charge additional fees to former employees.
Are 401(k) Rollovers Free?
A 401(k) rollover is free, but your new 401(k) or IRA account isn't. If you're considering doing a rollover into your new employer's 401(k), be sure to compare the fees of your current and previous employers' 401(k) plans. If your new employer's 401(k) plan costs less in fees, that's one good reason to roll over your 401(k) into their 401(k) plan.
Otherwise, consider doing a 401(k) rollover into a traditional or Roth IRA with lower fees. Keep in mind that a 401(k) plan lets you select investments only from a list that your employer provides. On the other hand, an IRA gives you or your portfolio manager carte blanche into selecting investments.
Safeguard Your Retirements and Maximize Your Returns
There's a right time and way to do a 401(k) rollover. A professional wealth manager can help you navigate the process, protect your assets and optimize your returns. Visit ModernWealthConcepts to learn more.