Roll over your 401(k) in 5 easy steps

If you are changing jobs, you may want to consider directly rolling over your 401(k) into an individual retirement account (IRA) to avoid unwanted fees and taxes. With a little bit of research and planning, the process can be fairly straightforward. Here are five easy steps you can take to directly roll over your 401(k).

First, what is the difference between a direct and indirect rollover?

It’s important to know the difference between a direct and indirect rollover. With a direct rollover, your money is transferred directly from your 401(k) into the IRA of your choice instead of handling the money yourself. With an indirect rollover, you are responsible for cashing out your retirement plan and investing the funds into the new IRA within 60 days, and 10-20% of the funds are withheld for taxes.

Decide on Roth or Traditional

The main difference between a Roth and traditional IRA is how your money is taxed. When rolling over your 401(k) into a traditional IRA, you could have a tax deduction on your contributions, and you won’t pay any taxes on the rollover amount until you retire. If you choose to roll over to a Roth IRA, you’ll have to pay taxes on the rolled amount, but withdrawals in retirement are tax-free after age 59½.

Consider Your Risk Tolerance

Your risk tolerance is how much you can tolerate the ups and downs of the market. To determine your tolerance level, you need to take into consideration things like your age, goals, and portfolio size. These factors will determine if your investment style is aggressive, moderate or conservative, and ultimately, this will drive how you should allocate your retirement funds for the best return on investment.

Understand Your Goals

What do you plan on doing with your investments? Whether you plan on traveling the world after retirement or wish to pay off your home in the next 10 years, understanding the timeline of your goals will affect how and where to invest your money, also known as asset allocation.

Determine Your Asset Allocation

Once you’ve determined the type of IRA to open, your individual risk tolerance and your goals, you need to decide how much and where to distribute your investments. The three main asset classes are equities (stocks), fixed-income (bonds) and cash and cash equivalents, and all have different levels of risk and return. For example, if you have a low-risk tolerance and simply want to save for your retirement 20 years down the road, you may decide to contribute a smaller portion of your income and allocate most of it in stocks.

Regularly Check in With Your Savings

Your IRA shouldn’t be a place where you “set it and forget it.” Instead, it’s important to have regular check-ins to determine any adjustments that need to be made. Your life’s circumstances and goals will change, and your portfolio will need to reflect these changes to accommodate your needs. Plan to check in on your investments once a year, and put your focus on rebalancing your asset allocation where needed.

Transferring your retirement funds from a 401(k) to an IRA doesn’t have to be a difficult process. At Wickham Financial and Insurance Services, our team of knowledgeable financial advisors can help you assess your personal goals to create a plan of action that will maximize your retirement investments.

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