Transferring your old 401(k) to an individual retirement account (IRA) or another 401(k) is referred to as a 401(k) rollover. Can you think of any scenario in which a 401(k) rollover would be advantageous to you?
An employee leaves a new job to take a
position elsewhere. You must typically transfer the money from an old 401(k) to
your new IRA account within 60 days of doing the 401(k) rollover.
Here are four steps to
roll over 401(k)s to IRAs
- You can open different types of IRA accounts
- Create an IRA account
- A direct rollover is possible with 401(k) plans or adhering to the 60-day rule
- Decide which investments to make
Step 1- You can open
different types of IRA accounts
When you roll over
your 401(k) to an IRA, you may have more investment options and lower fees than
when you had your old 401(k).
You will owe taxes on
the amount you roll over to a Roth IRA.
The tax deferral of a
rollover to a traditional IRA is a benefit.
You won't have to pay
taxes on a rollover to a Roth IRA if you're rolling over from a Roth 401(k).
Step 2 -Create an IRA
account
Generally, online brokers and Robo-advisors are the only options for getting an IRA. The choice depends on whether you like it managed for you or if you prefer to do it yourself.
The Robo-advisor can choose investments for you if you're not
interested in picking them yourself. These automated investment advisors create
a portfolio of low-cost funds based on your preferences, then self-rebalance
your assets over time to keep you on track, all for far lower fees than
conventional managers.
Online brokers allow you to buy and sell investments yourself if you want to build and manage your own investment portfolio.
Choose an investment provider that has a reputation
for great customer service, does not charge account fees, and offers investors
a wide range of low-cost investments.
Step 3- Direct rollover
is possible with 401(k) plans or adhering to the 60-day rule
401(k) plans that
offer direct rollovers cut a check directly to the IRA account you choose,
rather than to you personally.
Below are the steps
that you need to follow:
You can ask your
former employer's plan administrator to send a check or wire your account
balance to your new account provider by providing a few forms.
When you open a new account, you are given instructions on how and where the check or wire goes.
If
you want to keep the money in your 401(k), you may be able to do an indirect
rollover instead, which means you withdraw the money yourself and give it to
your IRA provider yourself, but that can be complex tax-wise. Direct rollovers
are generally recommended.
Indirect rollovers can result in your check being withheld 20% for taxes on your distributions.
The
entire balance of your IRA must be deposited into your account for you to get
that money back Upon receiving the distribution, you must return all
distributions - including any taxes withheld. You'll have to pay taxes on a
Roth IRA distribution unless you had a Roth 401(k). (Except if you want to
open a Roth IRA.)
Step 4- Decide which
investments to make
Choose your
investments once the money has been rolled over into your new IRA account.
ETFs or index mutual funds with low costs are often attractive to many investors. If you are not a professional, you should probably refrain from picking individual stocks or bonds.
Investing in mutual funds or exchange-traded funds (ETFs) is a good way
to obtain diversification and better long-term results.
In many 401(k) plans, money is invested in a target-date fund, something like a mutual fund that automatically adjusts investments as you approach a particular date, like retirement.
A target-date fund for your IRA may be available through an online
broker using a similar strategy (and perhaps at a lower price).
Your investments are
made by the algorithms of a Robo-advisor after you answer questions about
yourself on their site.