Can I Rollover My 401k To A Brokerage Account

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Its Easier With An Ira 401s Are More Complicated

• The Bottom Line

Whether or not you can roll funds from a 401 or an individual retirement account into a more liquid investment fund depends on a few factors. You may be able to change your investments in an IRA, but doing so within a 401 is a different matter, as these plans typically have limited options from which to choose.

Speaking in general terms, IRA and 401 assets that are distributed and not rolled over to another IRA or eligible retirement plan will be subject to income tax. They may also be subject to an early-withdrawal penalty of 10% if you are under age 59½.

What Type Of Ira Should I Open

During the process of opening your new account, you may get asked which type of IRA youd like to open. You might see the following options: Rollover IRA, Traditional IRA, or Roth IRA. Heres how to pick the right one:

• If you had a Traditional 401 pick a Rollover IRA or, if thats not available, Traditional IRA or, if thats not available, just IRA. The only exception would be if youre considering a Roth conversion, but this is an advanced tax planning strategy that most people dont need to worry about.
• If you had a Roth 401 pick a Roth IRA. Youll need to match the Roth 401 to a Roth IRA for tax reasons.
• If your 401 has mixed assets youll need to open two IRAs, one Roth and one Traditional to for their respective assets.

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Why Should I Roll My Retirement Plan Money Into An American Funds Ira

American Funds is one of the most experienced investment managers in the United States. Weve been managing investors assets since 1931. We take a conservative, long-term approach thats consistent with the needs of most people saving for the future. Thats why most of our shareholders investments are intended for retirement.

See What Our Clients Have To Say:

Client, 14 years

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*Consider all available options, which include remaining with your current retirement plan, rolling over into a new employers plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider such as range of investment options, fees and expenses, availability of services, and distribution rules . Depending on your plans investment options, in some cases, the investment management fees associated with your plans investment options may be lower than similar investment options offered outside the plan.

1Morningstar gives its best ratings of 5 or 4 stars to the top 32.5% of all funds based on their risk-adjusted returns. The Overall Morningstar Rating is derived from a weighted average of the performance figures associated with a funds 3-, 5-, and 10-year Morningstar Rating metrics. As of 7/31/21, 69 of 154 of our Investor Class funds received an overall rating of 5 or 4 stars.

3Generally, as long as youve held the account at least 5 years and youre age 59½ or older.

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Transfer Funds From Your Old Qrp

Contact the plan administrator of the QRP you are rolling , and request a direct rollover distribution payable to Wells Fargo. Make sure to:

• Ask to roll over the funds directly to Wells Fargo for benefit of your name.
• Reference both your name and the account number of the new IRA you set up.

They will either send the funds directly to Wells Fargo, or you will receive a check in the mail made payable to your IRA to deposit into your Wells Fargo IRA.

How The Rollover Is Done Is Important Too

Whether you pick an IRA for your rollover or choose to go with your new employer’s plan, consider a direct rolloverthats when one financial institution sends a check directly to the other financial institution. The check would be made out to the bank or brokerage firm with instructions to roll the money into your IRA or 401.

The alternative, having a check made payable to you, is not a good option in this case. If the check is made payable directly to you, your employer is required by the IRS to withhold 20% for taxes. As if that wouldn’t be bad enoughyou only have 60 days from the time of a withdrawal to put the money back into a tax-advantaged account like a 401 or IRA. That means if you want the full value of your former account to stay in the tax-advantaged confines of a retirement account, you’d have to come up with the 20% that was withheld and put it into your new account.

If you’re not able to make up the 20%, not only will you lose the potential tax-free or tax-deferred growth on that money but you may also owe a 10% penalty if you’re under age 59½ because the IRS would consider the tax withholding an early withdrawal from your account. So, to make a long story short, do pay attention to the details when rolling over your 401.

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How Nua Can Save Taxes: A Case Study

Let’s go through an example to demonstrate these tax treatments.

Mike is 57, about to retire, and has company stock in his 401 plan. The original value of the stock was $200,000, but it is now worth $1 million. If he were to roll the $1 million over to his IRA, the money would grow tax-deferred until he took distributions. At that time, the distributions would be taxed as ordinary income.

Also, if Mike didn’t sell the stock before he dies, the beneficiaries of his IRA will pay ordinary income tax on all of the money they receive, including the current value of the stock.

If, on the other hand, Mike withdraws the stock from the plan rather than rolling it into his IRA, his tax situation would be different, as would that of his heirs. He would have to pay ordinary income tax on the original cost of $200,000. However, the remaining $800,000 would not be subject to his ordinary income tax because of the NUA tax break.

If Mike immediately sold the stock, he would have to pay only the lower capital gains tax on that $800,000 NUA. Let’s say that Mike instead holds the stock for a few months before selling it. When he sells, he pays capital gains tax, rather than income tax, on the NUA before he transferred the stock to his brokerage account, and on any additional appreciation since then. And because the stock is not a part of an IRA, he does not have to worry about RMDs from the account, based on the stock’s value.

Here is the comparison if Mike immediately sells the stock:

Pick An Ira Account Type

There are two main types of IRAs that you can transfer 401 funds to: a traditional IRA or a Roth IRA. As we mention above, most people roll over their money into an account that has the same tax benefits as the one theyre transferring from.

For instance, lets say you have a traditional 401 account that allows you to contribute money and deduct it from your taxable income, all while staving off income taxes until you withdraw in retirement. In order to maintain this tax-deferred status, youll need to roll your 401 asset over into a traditional IRA. You still have the option of rolling over to a Roth IRA, though thatll mean youll pay taxes on that money for the current year.

On the flip side, those with a Roth 401 gain the perk of tax-free growth since the money they contribute has already had taxes paid on it. Because of this, the IRS does not allow Roth 401 account holders to roll funds over to anything but a Roth IRA or another Roth 401.

Only you can choose which type of IRA is best for your situation. If you can figure out whether your tax rate is higher now than it will be in retirement, then that should lead you in the right direction. You could also speak with a financial advisor if you have further questions.

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Can You Be Required To Roll Over Your 401

Sometimes you have no choice in the matter. You might be required to roll over your 401 if:

You dont meet a minimum balance requirement. For example, if you have less than $5,000 in your 401, your employer can require you to roll your 401 into a different account.

Your old employer changes 401 providers. Depending on your company, your account may not be rolled over and your existing provider may not continue service. If your account is rolled over, the new provider might have requirements you cant meet, or they might not provide the services you want.

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Rolling Over Into An Ira

Well handle the entire process for you online, for free!

• Well help you choose an IRA provider if you dont already have one
• Customer support available if you have questions along the way
• We get paid by the IRA provider if you open an account so our service comes at no cost to you!

Weve laid out a step-by-step guide to help you roll over your old Empower 401 in five key steps:

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Rolling Over To A New 401

The first step in transferring an old 401 to a new employer’s qualified retirement plan is to speak with the new plan sponsor, custodian, or human resources manager who assists employees with enrolling in the 401 plan. Because not every employer-sponsored plan accepts transfers from an outside 401, it is imperative for a new employee to ask if the option is available from the new employer. If the plan does not accept 401 transfers, the employee needs to select one of the three other options for the 401 account balance.

If the new employer plan accepts 401 transfers from other companies, there is often a substantial amount of paperwork that must be completed by the employee. The paperwork is provided by the new plan sponsor or human resources contact and requires the name, date of birth, address, Social Security number, and other employee identifying information.

In addition, the 401 transfer form must provide details of the old employer plan, including total amount to be transferred, investment selections held in the account, date contributions started and stopped, and contribution type, such as pre-tax or Roth. A new plan sponsor may also require an employee to establish new investment instructions for the account being transferred on the form. Once the transfer form is complete, it can be returned to the plan sponsor for processing.

A transfer from one 401 to another is a tax-free transaction, and no early withdrawal penalties are assessed.

Option : Roll It Into Your New 401

If your new employer offers a 401, you can possibly roll your old account into the new one. You may be required to be with the company for a certain amount of time before youre eligible to participate in their plan.

You can choose to do a Direct Rollover, whereby the administrator of your old plan transfers your account balance directly into the new plan. This only requires some paperwork.

Or, you can choose an Indirect Rollover. With this option, 20% of your account balance is withheld by the IRS as federal income tax in addition to any applicable state taxes. The balance of your old account is given to you as a check to deposit into your new 401 within 60 days. There is one catch, though. Youll need to deposit the entire amount of your old account into your new account, even the amount withheld for taxes. That means using personal cash to cover the difference and waiting until tax season to be reimbursed by the government.

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What If I Own Company Stock In My Plan When I Leave My Job

Your employer may require you to sell your shares when you leave the plan. You can then roll over the proceeds into an IRA or to your new employers plan. Or, if your old plan allows, you can roll over your shares from the plan directly into a rollover IRA established through a broker.

Check with your former employer about the rules governing the buying and selling of company stock, as well as the tax consequences. It may be to your advantage to take your distribution in stock rather than cash. If you intend to continue holding the stock, ask the receiving institution if they can accept another companys stock.

You Want Access To A Wider Range Of Asset Classes

Many retirement plans allow participants to allocate a portion of their total retirement savings to these self-directed accounts. This can be beneficial if you’re generally satisfied with your retirement plans overall investment lineup but want access to additional asset classes like emerging markets, international small-cap, or alternative asset classes such as real estate and commodities.

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Drawbacks Of Rolling Over Into A New 401

Like keeping your money in your previous employers plan, rolling over into a new 401 limits your control of your money and poses some other potential drawbacks.

Higher fees: After comparing fees and expenses, you may find that the new plan is more expensive than the previous one. Remember, even a margin of a percentage point can drastically eat into your earnings over a long period of time.

Less diversification: The investments offered in the new plan may be less varied than your old plan or potential IRA investments. And because the account will be managed by someone else, you wont have much of a say in how your money is invested.

Tax Consequences Of A 401 Rollover

If you handle it correctly, there are basically no tax consequences that come with a 401 rollover. More specifically, if you complete a direct rollover, your assets seamlessly move from one account to the other without any intervention from the IRS. The rollover doesnt show up on your tax return, nor does the IRS levy any taxes.

Conversely, the 60-day rollover faces a few tax implications. The reason for this is despite the fact that the money will pass through your control only momentarily, the IRS views it as a potential distribution. And because the IRS offers major tax benefits with retirement accounts, its extremely wary of when someone makes a withdrawal, especially a large one.

To cover itself, the IRS orders employers who you take a distribution from to withhold 20%. That can be a massive amount, especially if you have a large 401 balance. Its unfortunately up to you as the account holder to make up that difference before the 60-day period ends, otherwise youll lose the tax-deferred status for that money. Beyond that, if youre making the distribution before age 59.5, the IRS will hit you with a 10% early withdrawal penalty.

In todays day and age, theres virtually no reason a 401 plan provider wouldnt have the technical capabilities to transfer your rollover funds for you. But if the 60-day rollover is unavoidable, simply ask to have the check sent to you in the name of your new accounts custodian.

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Rollover To A Traditional Ira

Transferring funds between a traditional 401 and a traditional IRA or between a Roth 401 and a Roth IRA is relatively straightforward. In many cases, you can do a direct rollover, also called a trustee-to-trustee transfer. This involves your 401 provider wiring funds directly to your new IRA provider. Alternatively, your 401 provider may send you a check that you then deposit into your new IRA.

Look out for any taxes your provider may have preemptively deducted. You shouldnt owe any taxes or penalties as long as you deposit money in a tax-advantaged retirement account within 60 days.

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