If you're close to retirement or changing jobs, you may need to figure out what to do with the savings in your 401(k) account. This is where a 401(k) rollover comes in handy. Show
What is a 401(k) rollover?A 401(k) rollover is when you move money from a 401(k) into another tax-advantaged retirement account. You have 60 days from the date you receive the cash or assets from your 401(k) to put it into another retirement plan. There are four main options you can choose from when trying to figure out the best thing to do with your old 401(k):
Each option has different tax implications, so it's important you understand them before making a decision. 401(k) rollover to IRARolling over your 401(k) to an IRA has its benefits, including more investment choices, and sometimes lower fees. There are three types of 401(k) rollovers you can do if you decide you’d like to roll your assets into an IRA:
How to roll a 401(k) into an IRAHere's how to start and finish a 401(k) to IRA rollover in three steps. 1. Choose which type of IRA account to openAn IRA may offer you more investment options and lower fees than your old 401(k) had. 2. Open your new IRA accountYou generally have two options for where to get an IRA: a robo-advisor or an online broker.
3. Ask your 401(k) plan for a direct rolloverHere are the basic instructions for a direct rollover:
Indirect rollovers - remember the 60-day ruleIf you would prefer not to do a direct rollover, you can opt for an indirect 401(k) rollover instead. This essentially means you withdraw the money and give it to the IRA provider yourself, but that can create tax complexities. A direct rollover might be easier. Why? If you do an indirect rollover, the plan administrator may withhold 20% from your check to pay taxes on your distribution. To get that money back, you must deposit into your IRA the complete account balance — including whatever was withheld for taxes — within 60 days of the date you received the distribution. (The exception to this is if you want to open a Roth IRA, which will require taxes paid on the distribution, unless your money was in a Roth 401(k). For example, say your total 401(k) account balance was $20,000 and your former employer sends you a check for $16,000 (that’s the full account minus 20%). Assuming you’re not planning to go the Roth route, you'd need to come up with $4,000 so that you can deposit the full $20,000 into your IRA. At tax time, the IRS will see you rolled over the entire retirement account and will refund you the amount that was withheld in taxes. Investing the money in your IRAOnce the money is rolled over into your new IRA account, select your investments.
Those who would rather automate the investing process can use a robo-advisor for this. When you open a new account at a robo-advisor, that robo-advisor’s algorithms usually will select your investments based on questions you answer. Rolling your old 401(k) over to a new employerTo keep your money in one place, you may want to transfer assets from your old 401(k) to your new employer’s 401(k) plan. Doing this will make it easier to see how your assets are performing and make it easier to communicate with your employer about your retirement account. To roll over from one 401(k) to another, contact the plan administrator at your old job and ask them if they can do a direct rollover. These two words — "direct rollover" — are important: They mean the 401(k) plan cuts a check directly to your new 401(k) account, not to you personally. Generally, there aren't any tax penalties associated with a 401(k) rollover, as long as the money goes straight from the old account to the new account. Although this route may help you stay organized with fewer accounts to keep track of, make sure your new 401(k) has investment options that are right for you and that you aren't incurring higher account fees. Keeping your 401(k) with a former employerIf your ex-employer allows it, you can leave your 401(k) money where it is. Reasons to do this include good investment options and reasonable fees with your former employer’s plan. Keep in mind that you may not be able to ask the plan administrator any questions, you may pay higher 401(k) fees as an ex-employee, and you can’t make additional contributions. Another noteworthy thing to consider is that your former employer could decide to move your old 401(k) account to another provider. If your balance is between $1,000 and $5,000 and your former employer wants to close your old 401(k) account, your former employer can, but it is required to transfer the balance to an IRA in your name and notify you in writing. For balances under $1,000, your former employer can send you a check, which you'd need to put in a retirement account within 60 days to avoid taxes and penalties. Cashing out your 401(k)The last option you have for an old 401(k) account is cashing it out, but that may come at a high cost. You can ask your former employer for a check, but as with the indirect rollover, your former employer may withhold 20% to pay Uncle Sam for your distribution. The IRS also may classify this cash out as an early distribution, meaning you incur a 10% penalty and potentially taxes unless it’s a qualified distribution. Advertisement
Frequently asked questions Is a rollover IRA the same as a 401(k)? Generally, you set up a rollover IRA so that you can move money from a 401(k) without paying income tax when you move the money. (If you were to simply withdraw the money from your 401(k), rather than roll it over, you'd owe income tax and probably an early withdrawal penalty.) A rollover IRA lets you move money out of a 401(k) without sacrificing the benefit of delaying your tax bill until retirement. While 401(k) and rollover IRA accounts have some similarities, they’re also quite different. Both types of accounts offer pre-tax savings: You can put money in before you pay taxes on it and you can delay your income tax payment until you take the money out in retirement. But with a 401(k), your investment choices are dictated by your employer. With an IRA, your investment choices are almost unlimited, because most brokers offer a wide array of investment options. On the other hand, 401(k)s offer a higher annual contribution limit of $19,500 in 2021 and $20,500 for 2022 ($26,000 in 2021 and $27,000 in 2022 for those age 50 or older), compared with the IRA contribution limit of $6,000 in 2021 and 2022 ($7,000 if age 50 or older). There's no limit on how much you can roll into an IRA from a 401(k). Is there a limit on the amount of money I can roll over to an IRA? No. But again, you'll need to abide by your annual contribution limits for future contributions to your IRA. Does my rollover count as a contribution? No. It is considered separately from your annual contribution limit. So you can contribute additional money to your rollover IRA in the year you open it, up to your allowable contribution limit. After I create a rollover IRA, can I contribute money to it? Yes. The only cautions here are 1) contributions to an IRA are limited to $6,000 per year ($7,000 if you're age 50 or older), 2) if you chose a Roth IRA for your rollover, your ability to contribute may be further restricted based on your income, 3) if you mingle IRA contributions with IRA rollover funds in one account, that may make it difficult to move your rollover funds back to a 401(k) if, say, you start a new job with an employer with a stellar 401(k) plan, and 4) your ability to deduct your traditional IRA contributions from your taxes each year may be restricted if you or your spouse has access to a workplace retirement plan and you earn over a certain threshold. See IRA contribution limits for more details. Can I have more than one rollover IRA? Yes. There is no limit to the number of IRAs you can have. However, you may find it easier if you keep your number of IRAs low, as this will make it easier to keep track of your funds and assess things like asset allocation. Downsides of doing a 401(k) rollover A rollover isn't for everybody. Leaving an old 401(k) alone can have benefits, too:
Can I contribute a lump sum to my 401k?Although you can't boost your account by making a lump sum 401k contribution whenever you like, you might be able to increase your paycheck contributions, make catch-up contributions or use other methods to increase your balance.
Can 401k contributions be reversed?Fortunately, you can reverse an accidental 401k contribution. If you made an accidental contribution to your plan, you should notify your employer or plan administrator. The excess amount will usually be returned to you by April 15, and you will have to add those earnings to your taxable income.
Can I take money from my 401k?Yes, you can withdraw money from your 401k before age 59 ½. However, early withdrawals often come with hefty penalties and tax consequences. If you find yourself needing to tap into your retirement funds early, here are rules to be aware of and options to consider.
What happens when you put money into a 401k?401(k) contributions are “before tax” money
The amount you choose to contribute to your 401(k) is deducted from your paycheck before taxes are taken out. As a result, you're paying taxes on a smaller portion of your salary and your overall tax rate may be lower.
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