How to Rollover 401k to IRA

Estimated reading time: 3 minutes(Last Updated On: December 23, 2020)

After leaving a job, you may be wondering what on earth you should do with your old 401(k) funds. There are a few options to consider, each with their pros and cons. Always consult your financial advisor before transferring funds, as they can offer advice on which type of transfer is best for your stage of life and how to move the funds hassle-free. Your 401(k) options include:

    • Keeping your funds where they are
    • Rolling the funds into an IRA or Roth IRA
    • Transferring the funds into your new 401(k)
  • Cashing out

If you keep the funds where they are, your old employer won’t make any matching contributions, and you may not be able to make any contributions yourself depending on your employer’s specific rules. You will also be limited to the plans they provide or the fees they entail, which you may or may not like. Consolidating your 401(k) funds into a plan of your new place of employment will keep things simple and all in one place. If you change jobs frequently, having multiple plans sitting at each old place of employment may get confusing.

Cashing out is usually only utilized as a last resort option. You may be subject to a 10% fee if you are younger than 55 or between 55 and 59 but still working. You can avoid the 10% fee if you are older than 59 ½ or you are between 55 and 59 but are retired. What you withdraw will also be counted as taxable income and may bump you to a higher tax bracket. If you need to supplement your income until you have a steady stream once again, most advisors suggest only withdrawing the absolute minimum necessary and rolling over the rest into an IRA.

Rolling Over a 401(k) to an IRA

If your employer writes a check directly to you for the funds in your 401(k), you will have 60 days to deposit those funds into a new qualified plan. Failing to deposit the funds within 60 days will result in taxation on the funds since it will be considered income, as well as a 10% fee if you are not 59 ½ yet. Furthermore, the IRS requires that your employer withhold 20% of the funds just in case you don’t make the deadline, so they are guaranteed their tax money. If you make the deadline, however, you should receive the 20% back at tax time. You can avoid all of this by doing what’s called a “direct transfer” from the 401(k) account into your new IRA account. This is usually done electronically as long as you have an account set up with a qualified institution already.

If you transfer a standard 401(k) into a Traditional IRA or a Roth 401(k) into a Roth IRA, everything should go smoothly. If you transfer a standard 401(k) into a Roth IRA, you will likely owe taxes on the amount. This may be advantageous if you are expecting the tax rates to be higher than they are now at your retirement since Roth IRA distributions are tax-free. Before converting, always seek the advice of your financial advisor.

Leave a Reply

Your email address will not be published. Required fields are marked *