Changing jobs most likely includes making changes to your retirement savings plan. If you have a 401(k) account with your company, one option for you when you leave is to roll over your 401(k) funds into an individual retirement account (IRA). Generally, this is a fairly straightforward process, but educating yourself could help you avoid unexpected tax considerations. Read below to learn how to open a rollover IRA for your retirement savings and how to transfer your savings to your new account.
Determine the Type of 401(k) You Have
Before leaving your job, be sure to confirm whether your 401(K) plan is a Roth 401(k) account or a traditional pre-tax 401(k) account. This is important for managing your tax liability when rolling over your 401(k) to an IRA.
Choose the Type of IRA to Open
When setting up your rollover account, you have the option to choose between a traditional IRA and a Roth IRA. The easiest approach to avoid any tax payments is to transfer a Roth 401(k) to a Roth IRA or a traditional 401(k) to a traditional IRA. Transferring your 401(k) funds to an IRA with different taxation rules is possible, but the process may come with a tax bill at the end. For example, rolling over a traditional 401(k) to a Roth IRA requires what is known as a Roth conversion to calculate the taxes you owe as a result of the transition. This is why the first step above, determining the type of 401(k) you have, is critical before opening an IRA.
Choose a Provider
The next step after deciding on the type of IRA you want to open is to choose a provider. You can choose between banks, insurance companies, brokerage firms and mutual fund companies. There is no right or wrong choice. Ultimately, it comes down to which company you trust to manage your retirement savings. We recommend researching your options independently and in conjunction with the guidance of a financial advisor.
Transfer Funds from Your 401(k)
Once your IRA account is up and running, the final step is to transfer your funds from your 401(k) plan to your new IRA account. The transfer can be completed as either a direct transfer or an indirect transfer. With a direct transfer, or trustee-to-trustee transfer, your funds are moved directly from your current 401(k) account to your IRA. In a direct transfer, you never take possession of the funds.
Another option is an indirect transfer. With this method, your 401(k) provider distributes the funds to you personally. Once you receive the funds you have 60 days to deposit the money in your new IRA account. This is known as the 60-day rule. Indirect transfers often come with tax consequences that can be avoided by using the direct transfer approach. Given the option, direct transfers are usually the preferred method.
Rolling over your 401(k) to an IRA is a relatively simple process with the right planning. Wickham Financial & Insurance Services has a team of financial advisors who can help you establish the best IRA for your situation and assist you with ensuring your funds roll over without any unexpected tax consequences. Contact us today and schedule a time to meet with one of our team members. We look forward to getting to know you and guiding you through your financial planning.
Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.