Sunday, September 17, 2023

Should I Roll My 401k Into An Ira After Retirement

Don't Miss

Cons Of A Total 401 Cash

401k to IRA Rollover Pros and Cons

Youre losing investment potential.

A large loss of accrued gains can impact your retirement plans.

Youre incurring tax and penalties.

The IRS charges a mandatory 20% withholding tax since this is considered income thats thus far been tax-deferred, and an early-withdrawal penalty if youre younger than 55. State and local taxes, depending upon where you live, may also apply.

Roll It Into A New 401 Plan

The pros: Assuming you like the new plans costs, features, and investment choices, this can be a good option. Your savings have the potential for growth that is tax-deferred, and RMDs may be delayed beyond age 72 if you continue to work at the company sponsoring the plan.

The cons: Youll need to liquidate your current 401 investments and reinvest them in your new 401 plans investment offerings. The money will be subject to your new plans withdrawal rules, so you may not be able to withdraw it until you leave your new employer.

How To Pick An Ira To Roll Over To

The most important question you need to ask is whether you want to start a traditional IRA or a Roth IRA. Traditional IRAs work much like traditional 401 plans. You contribute money before you pay taxes. The 2021 maximum contribution limit for traditional and Roth IRAs is $6,000.

With a traditional IRA, the money you contribute is deducted from your taxable income for the year. When you reach retirement, the money is taxable as you withdraw it. A Roth IRA, however, works differently. You contribute money post-taxes. The money is then not taxable when you withdraw it in retirement. If you think you might want to keep contributing to your new IRA after the rollover is complete, its important to decide which type of IRA you want.

Its also important to consider the tax implications. If you have a traditional 401 plan, that means you didnt pay taxes on the money when you contributed it to your account. If you want to move that money into a Roth IRA, youll have to pay taxes on it. You can roll over from a traditional 401 into a traditional IRA tax-free. Same goes for a Roth 401-to-Roth IRA rollover. You cant roll a Roth 401 into a traditional IRA.

Read Also: Can I Move My 401k To Gold

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 new financial institution 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 plan administrator 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.

Can You Contribute To A Rollover Ira

401(k) Rollover near me in Ponte Vedra, Jacksonville, Fleming Island FL

Yes, you can contribute to a rollover IRA. Youll be subject to the same annual contribution and income limits that apply to traditional and Roth IRAs.

There is a potential catch, though: Contributing to your rollover IRA may make it difficult to roll it into a new employers retirement plan down the line. Each plan will have its own rules, and your plan might prevent an incoming rollover if new contributions are commingled with your previous rollover.

Also Check: Should I Roll My 401k Into An Ira

Q I Retired From My Job On April 3 2020 I Have A 401 With This Employer With A Balance Of Approximately $600000 Should I Rollover The 401 Into An Ira Or Leave It Where It Is Retired

A. Congratulations on your retirement.

There are many reasons why someone may leave their 401 in place after leaving a job.

The perception of lower costs is one of the main reasons.

But theres been a lot of questions surrounding the lack of transparency of 401 plan fees.

Some 401 plan costs are actually quite high, said Matthew DeFelice, a certified financial planner with U.S. Financial Services in Fairfield.

I think its worth looking at the internal fund fees expense ratios on the investments in your 401 and comparing them to what similar investments may cost in an IRA, he said. This will require a bit of research on your part, but its worthwhile to take the time to do it so you know what you are dealing with.

Arguably the best reason for keeping assets in a 401 plan whether thats rolling it into your new employers 401 or keeping your old one applies only if youre planning to retire between ages 55 and 59 ½, DeFelice said.

In general, you must pay a 10% early withdrawal penalty if you take money out of your 401 or IRA before you reach age 59½, DeFelice said.

There is, however, an important exception for 401 plans: Workers who leave their jobs in the calendar year they turn 55 or later can take penalty-free withdrawals from that employers 401 plan, he said.

But if you roll that money into an IRA, youll have to wait until youre 59½ to avoid the penalty unless you qualify for one of a handful of exceptions, he said.

Email your questions to

Why You Should Move Your 401 Into An Ira


The 401 is a blessing for many people, as it allows them to build wealth over time using dollar-cost averaging. Still, sometimes it makes more sense to channel some of that money from the employer-based account into your own individual retirement account. The ever-astute Rick Kahler, the founder of Kahler Financial Group, in Rapid City, S.D., tells us why:

Larry Light: Why and when should you move your 401 into an IRA?

Rick Kahler: If your employer offers a 401 or other retirement plan, contributing to that plan is a foundation of your retirement savings. However, as you approach retirement age, you might consider moving some of your retirement funds out of your employer’s plan and into an IRA at a custodian like TD Ameritrade or Fidelity.

Such a rollover is often done when you leave an employer, though many employers give you the option of keeping your retirement account with them. What isnt popularly understood is that you also can do a rollover while you’re still employed, as long as you are over 59½.

Light: Why do this?

Kahler: One reason to consider leaving your employers plan is that most of them have higher overall fees than an IRA, especially if you choose from low-cost index mutual funds or exchange traded funds from a company like Vanguard or Dimensional Fund Advisors. Its not uncommon to save up to 1% annually by making a rollover into these mutual funds.

Light: What about withdrawing the money to live on? Is there a difference?

Also Check: How To Get Money From 401k Early

How Can I Roll Over My 401 Into An Ira

You can convert your 401 into an IRA fairly easily. Let us go through the steps:

  • First off, you have to inform your 401 plan administrator or your company HR explaining that you have decided to rollover your 401 into anIRA and get an application form for the same.
  • Afterward, contact the concerned custodian of your chosen IRA, be it a traditional IRA or a Roth IRA. You can now go ahead and open an account.
  • Once your account becomes active, use the forms sourced from your company HR or your 401 plan administrator to request a direct rollover of funds into your chosen IRA.
  • Once your request gets approved, the administrator will transfer the funds into your new IRA account. You could also request the administrator to furnish you with a check in the name of the IRA. Ensure that the check is not presented as a distribution.
  • You also have the option of choosing an indirect rollover wherein 20 percent of your 401 will be withheld for taxes by the administrator. You may apply for a tax refund at a later date.
  • What Are The Benefits Of A Roth Individual Retirement Account

    How to Roll Over a 401(k) to an IRA

    A major benefit of a Roth individual retirement account is that, unlike traditional IRAs, withdrawals are tax-free when you reach age 59½. You can also withdraw any contributions, but not earnings, at any time regardless of your age.

    In addition, IRAs typically offer a much wider variety of investment options than most 401 plans. Also, with a Roth IRA, you dont have to take required minimum distributions when you reach age 72.

    You May Like: Is 401k A Good Investment

    Which Ira Should I Rollover To

    If you are set in your mind that you want to convert your existing 401 plan into an IRA, you need to ensure that you choose the right type of IRA for conversion. Lets go through some of the guidelines:

    • If you envision your taxable income or overall tax bracket to be lower during your retirement, you should go for a traditional IRA. But if you expect your taxable income or the overall tax brackets to be higher during your golden years, then you would be wise to choose a Roth IRA.
    • If you are a high net worth individual or a high income-earner, you would be better off choosing a traditional IRA since it has no cap on income, unlike a Roth IRA wherein certain income limits act as a deterrent for HNWIs to contribute to it.
    • If you wish to take out an early withdrawal and want to avoid paying a penalty, you should consider converting your traditional IRA to a Roth IRA, as you can make early withdrawals provided they meet certain conditions such as first-time home purchase, college expenses, and birth or adoption expenses.
    • Before you can make a withdrawal from a Roth IRA account, you need to have held the account for at least 5 years and be 59.5 years of age or older. Moreover, there are no minimum time restrictions that need to be met before you take a distribution of money.

    Rolling Your Old 401 Over To A New Employer

    To keep your money in one place, you may want to transfer assets from your old 401 to your new employers 401 plan. Doing this will make it easier to see how your assets are performing and make it easier to communicate with your employer about your retirement account.

    To roll over from one 401 to another, contact the plan administrator at your old job and ask them if they can do a direct rollover. These two words “direct rollover” are important: They mean the 401 plan cuts a check directly to your new 401 account, not to you personally.

    Generally, there aren’t any tax penalties associated with a 401 rollover, as long as the money goes straight from the old account to the new account.

    Although this route may help you stay organized with fewer accounts to keep track of, make sure your new 401 has investment options that are right for you and that you aren’t incurring higher account fees.

    Don’t Miss: How To Find Out If I Have Money In 401k

    Should I Roll Over My 401

    Theres a lot to consider when deciding whether to roll over your 401 after a job change. The available options of keeping your account with your former employer or rolling it over into a new tax-deferred plan pose a number of pros and cons, all of which factor into the decision that you will ultimately make. A financial advisor can help guide you through this decision and others like it. Lets break down the reasons for rolling over and not rolling over your 401.

    Rolling Over To An Ira Vs Retaining An Employer Retirement Plan

    Listen Money Matters! A Personal Finance Show on How to Invest Simply ...

    Should you choose a rollover IRA or hang on to your employers retirement plan? In this article, well walk you through key considerations to help you make a smart choice.

    The average worker in the U.S. today will hold 10 different jobs before the age of 40, according to the Bureau of Labor Statistics. And that figure is expected to grow in the years ahead. If youre among the 64% of Americans with access to a defined contribution retirement plancommonly known by its IRS designation as a 401, or in some cases a 403 or 457through your employer, this means youll likely face this decision several times throughout your life: What should I do with my existing plan?

    When youre leaving a job with a retirement planor considering what to do with an older account youve held ontoyou have 4 options:

    Choosing a rollover IRA can potentially bring you many benefits: reduced costs, consolidation, a wider range of investment options, and tax advantages. But you should keep some particulars in mind as you weigh the decision.

    Recommended Reading: How Much Can You Contribute To 401k

    Rolling 401 Assets Into An Ira

    When you retire or leave your job for any reason, you have the right to roll over your 401 assets to an IRA. You have a number of direct rollover options:

    Rolling your traditional 401 to a traditional IRA. You can roll your traditional 401 assets into a new or existing traditional IRA. To initiate the rollover, you complete the forms required by both the IRA provider you choose and your 401 plan administrator. The money is moved directly, either electronically or by check. No taxes are due on the assets you move, and any new earnings accumulate tax deferred.

    Rolling your Roth 401 to a Roth IRA. You can roll your Roth 401 assets into a new or existing Roth IRA with a custodian of your choice. You complete the forms required by the IRA provider and your 401 plan administrator, and the money is moved directly either electronically or by check. No taxes are due when the money is moved and any new earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the IRA has been open at least five years and you are at least 59½.

    Rolling your traditional 401 to a Roth IRA. If your traditional 401 plan permits direct rollovers to a Roth IRA, you can roll over assets in your traditional 401 to a new or existing Roth IRA. Keep in mind youll have to pay taxes on the rollover amount you convert.

    How A Roth Ira Conversion Can Leverage Currently Low Tax Rates

    One of the potentially overlooked silver linings of the past years economic challenges is a favorable income tax environment created by the 2017 Tax Cuts and Jobs Act. If youre considering a Roth IRA conversion1 from your 401, youll be paying some of the lowest tax rates in history on those converted assets and doing it all at one time. However, if you went with a traditional IRA rollover, you may pay higher taxes in retirement on your RMDs.

    If youve lost your job, or your income level drops, you can convert your 401 assets at your new, lower, tax bracket. Say, for example, you convert your 401 assets to a Roth IRA, you may be paying taxes at a reduced rate right off the bat, explains Markwell. And if taxes rise between now and your retirement target date, at which time youd otherwise take distributions, you will have further benefited tax-wise from that earlier conversion.

    Keep in mind that establishing an IRA with efficient growth goals may call for more active management on your part, depending on your retirement goals. A financial professional can help tailor your investments to your individual strategy and also help you revisit and refine that plan as needed.

    Also Check: How Many Loans Can I Take From My 401k

    When Does A Roth Conversion Make Sense

    Now, there is one other type of rollover we need to talk about: a Roth conversion. That happens when you roll over money from a traditional 401 into a Roth IRA.

    Heres how it works: When you put money into your traditional 401, you used pretax dollarsthat means it hasnt been taxed yet. So, when you transfer that pretax money into a Roth IRA, which is funded with after-tax dollars, youll have to pay taxes on that money now. Thats the bad news.

    But the good news is that from now on, that money will grow inside your Roth IRA tax-free and you wont pay any taxes on that money when youre ready to withdraw from the account in retirement. A Roth conversion might feel like ripping off a Band-Aid now, but itll feel great once you retire.

    You might want to seriously consider doing a Roth conversion only if you can afford to pay the tax bill with cash you have saved up. But be careful, because a conversion could add thousands of dollars to your tax bill. If thats just too much for you to stomach, then stick with a traditional IRA rollover.

    This is a big decision, and you dont have to make it alone! Get in touch with a tax advisor who can help you understand the tax implications of a Roth conversion and help you decide which option might work best for you.

    More articles

    Popular Articles