What Are My 401k Rollover Options?

If you are wondering what your 401k rollover options are we hope the two articles below will help answer that question for you.

Your 401k Rollover Options
By Julie-Ann Amos

Do you know what your 401k rollover options are? Perhaps you are changing employers. You may just be looking for a more lucrative type of retirement plan. In either of these situations, and many others, you will need to roll over your funds from one plan to the next. It is important to note that the rolling over method of switching accounts is critical to avoiding heavy penalties in the form of taxes from the IRS. However, it is just as important to invest in the right plan as you need.

Staying with the 401k

One of the options you have with your account is to keep it with the same type of retirement account (the 401k) and just switch financial institutions that are managing it. You can do this when your employer changes companies or even when you go from one employer to the next. The IRS has no problem with you switching investment companies. However, the funds need to move from one company to the new company without you getting them in order to protect them from taxes.

A New Type of Retirement Account

Some people do not like the 401k model and hope to get into another method of planning for retirement. If that is the case, you can move your funds from this account into another type. However, if you make the move to a Roth IRA or other already taxed style of retirement account, you will need to pay taxes on the funds you put into the account prior to making the deposit. Keep in mind that the 401k is a pre tax deposit meaning that you were not charged any income tax at the time that the funds were deposited into your account. If you move those funds into an after tax style account, you will pay income tax on them first. Also, to avoid any penalty, the funds need to change hands without you touching the money.

If you have not made your decision yet, you can take a withdrawal. Your employer will hold back 20 percent of the balance based on IRS rules. If you deposit the funds into a qualified retirement account within 60 days, that 20 percent is added back into the retirement account. If not, the IRS may charge you income tax plus another 10 percent fine on your total balance. That is why it is so important to know your 401k rollover options before you make any move.

Julie-Ann Amos is a professional writer who writes on many topics, including 401k rollover options. For more info, check out the 401k Hardship Withdrawal blog.

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401k Rollover Options Best Support Your Retirement Goals
By Bob I Richards

When evaluating your retirement investment strategy, keep in mind that a 401k rollover is a tool and when using that tool, you can’t afford to lose sight of your overall retirement goals. Those goals will be different for every investor, but the imperative of working towards those goals is the same for each and every investor with a retirement account. While there are particular strategies you should keep in mind when you doing a 401k rollover into or out of your 401k account, maximizing the return on your investment should remain in the forefront of your mind.

However, the specifics of your investment goals take a backseat to one thing – maintaining the tax-deferred status of your investment. Deferring or delaying the tax burden on your money is likely the reason you have a retirement account in the first place, so don’t lose this advantage by performing your 401k rollover incorrectly. Unless you’re planning to make the switch to a Roth account (in which case, you’ll be required to pay taxes on any money you transfer), maintaining this tax status takes precedence over all other goals and all other techniques.

The first thing you need to determine is whether or not it makes sense for you to perform a 401k rollover in the first place. Unless there’s a distinct difference between one account and the other – say, for example, a larger yield on the investments or dramatically better customer service – there’s really no need to do a 401k rollover. On the other hand, if you would like to have all of your money in one place so that you can exert tighter control over the investments, a 401k rollover to IRA may be the best course of action for you.

The next thing you’ll need to determine is the way the IRS designates your current retirement account, as well as the retirement account you’re planning to move your funds into. Let’s say you’re at a new job and are offered an IRA plan as part of your benefits package. Before you can begin a 401k rollover to IRA to move your old retirement funds into the new account, you need to know that the account is active and ready to receive money. It is also a good idea to know the tax status of any account you’re rolling money from. These two questions form the basis of a successful 401k rollover that will support your retirement goals.

Lastly, be sure to request a direct 401k rollover when initiating the transfer of your money. This way, you ensure that the tax-deferred status of your money is maintained and that you won’t be subject to the additional taxes and penalties that can come with an indirect rollover. If you aren’t familiar with the distinction, know that an indirect rollover occurs when the money comes into the hands of the account holder before it’s put into another retirement account. This type of transaction runs the risk of being mischaracterized by the IRS as a withdrawal, which is therefore subject to taxes and penalties.

The direct rollover avoids these problems because the money moves directly from the administrator of one IRA to another. IRS regulations say this is a reportable event, but not a taxable one, so the all-important tax-deferred status of your money is maintained. Your 401k rollover options as to whether to rollover the balance, how to invest the balance, who to specify as beneficiaries and how to take distributions are not decisions to be made hastily.

See more articles on maximizing your retirement income and retirement investment choices.

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