Contact Your Current 401 Provider And New Ira Provider
Ideally, you want a direct rollover, in which your old 401 plan administrator transfers your savings directly to your new IRA account. This helps you avoid accidentally incurring taxes or penalties. However, not every custodian will do a direct rollover.
In many cases, youll end up with a check that you need to pass on to your new account provider, Henderson says. Open your new IRA before starting the rollover so you can tell the old provider how to make out the check.
The goal, Henderson says, is to avoid having to ever put the money into your personal bank account.
You only have 60 days to complete the transaction to avoid it being a taxable event, and its best to have everything set up before getting that check, Henderson says.
Direct Vs Indirect Rollovers
A direct rollover is when your money is transferred electronically from one account to another, or the plan administrator may cut you a check made out to your account, which you deposit. The direct rollover is the best approach.
In an indirect rollover, the funds come to you to re-deposit. If you take the money in cash instead of transferring it directly to the new account, you have only 60 days to deposit the funds into a new plan. If you miss the deadline, you will be subject to withholding taxes and penalties. Some people do an indirect rollover if they want to take a 60-day loan from their retirement account.
Because of this deadline, direct rollovers are strongly recommended. In many cases, you can shift assets directly from one custodian to another, without selling anything. This is known as a trustee-to-trustee or in-kind transfer.
Otherwise, the IRS makes your previous employer withhold 20% of your funds if you receive a check made out to you. It’s important to note that if you have the check made out directly to you, taxes will be withheld, and you’ll need to come up with other funds to roll over the full amount of your distribution within 60 days.
To learn more about the safest ways to do IRA rollovers and transfers, download IRS publications 575 and 590-A and 590-B.
How Do I Choose An Ira Provider
Many financial institutions offer IRAs, including brokerage firms, banks, and newer fintech companies. In order to pick the best account for you, theres one up-front question to answer:
Do you want to make your own investment decisions, or would you rather have the investing decisions made for you so you can just set-it-and-forget-it?
If you want to make your own decisions, then what youll want is a self-directed IRA. That allows you to make your own trading decisions and invest in whichever financial securities youd like.
The key features to compare when choosing among self-directed IRAs include:
- What do you want to invest in? The exact investment options among IRA providers varies. Most of them allow you to invest in stocks, ETFs and options. Other specialized IRA providers will let you invest in private assets and cryptocurrency.
- Access to research and data. Some brokers provide access to premium research and data. If youre a more hands-on investor, this might be important to you.
- Ease of use while user interfaces are getting better across the board, newer fintech providers tend to be more popular with those who really value an intuitive app experience.
The key features to compare when choosing an automated account include:
Get matched with an IRA provider based on your preferences! If you choose to do an 401-to-IRA rollover, well match you with a provider based on your preferences as part of our rollover process.
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Which One Do You Choose
Where are you now financially compared to where you think youll be when you tap into the funds? Answering this question may help you decide which rollover to use. If youre in a high tax bracket now and expect to need the funds before five years, a Roth IRA may not make sense. Youll pay a high tax bill upfront and then lose the anticipated benefit from tax-free growth that wont materialize.
If youre in a modest tax bracket now but expect to be in a higher one in the future, the tax cost now may be small compared with the tax savings down the road. That is, assuming you can afford to pay taxes on the rollover now.
Bear in mind that all withdrawals from a traditional IRA are subject to regular income tax plus a penalty if youre under 59½. Withdrawals from a Roth IRA of after-tax contributions are never taxed. Youll only be taxed if you withdraw earnings on the contributions before you’ve held the account for five years. These may be subject to a 10% penalty as well if youre under 59½ and dont qualify for a penalty exception.
Its not all or nothing, though. You can split your distribution between a traditional and Roth IRA, assuming the 401 plan administrator permits it. You can choose any split that works for you, such as 75% to a traditional IRA and 25% to a Roth IRA. You can also leave some assets in the plan.
Know The Options With Your Old 401
According to the Department of Labor , the average person born between 1957-1964 will hold nearly 12 jobs in their lifetime. that Millennials will have, on average, four jobs in their first decade after college.
Its obvious the average person will hold multiple jobs during their career. As you can see, if each of those jobs came with an employer-sponsored 401, those plans would add up quickly, making it vital to know what to do with those old 401 plans.
Here are four key options to know when looking at an old 401 plan:
As you can see out of the four options, the middle two really stand out. Assuming you want to pursue one of those options, heres how to rollover a 401.
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Roll Over Your 401 To A Traditional Ira Then Convert It To A Roth Ira
Contributions to your 401 plan were pre-tax. This means your employer deducted them from your taxable salary when reporting your income to the IRS. Same goes for any employer matches. So you have yet to pay taxes on any contributions and on any accrued earnings.
Traditional IRAs are also tax-advantaged. The difference, of course, is that individuals rather than employers send their contributions to their financial institutions and claim the deduction when filing their taxes. So like 401 balances, the money in an IRA is tax-deferred. You wont owe taxes on it until you retire and start taking distributions.
This is why rolling over your 401 to a traditional IRA is fairly straightforward. Its an apples-to-apples transaction.
No doubt, there are significant advantages to moving your 401 money to a Roth IRA. But, as noted earlier, it will be a taxable event. You will owe taxes not only on your contributions and your companys contributions if it has a matching program, but also on your earnings, which include capital gains and dividends. This bump in income could boost you to a much higher income bracket so that you are paying more tax than if you left the money in a traditional IRA and paid taxes as you made withdrawals in retirement.
To Ira Rollover Checklist
Here are the steps to transfer a 401 to an IRA:
Now, lets take a deeper look at each of these options.
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S To Roll Over 401k To Ira
The process is simple:
Dont Roll Over Employer Stock
There is one big exception to all of this. If you hold your company stock in your 401, it may make sense notto roll over this portion of the account. The reason is net unrealized appreciation , which is the difference between the value of the stock when it went into your account and its value when you take the distribution.
Youre only taxed on the NUA when you take a distribution of the stock and opt notto defer the NUA. By paying tax on the NUA now, it becomes your tax basis in the stock, so when you sell it , your taxable gain is the increase over this amount.
Any increase in value over the NUA becomes a capital gain. You can even sell the stock immediately and get capital gains treatment. The usual more-than-one-year holding period requirement for capital gain treatment does not apply if you dont defer tax on the NUA when the stock is distributed to you.
In contrast, if you roll over the stock to a traditional IRA, you wont pay tax on the NUA now, but all of the stocks value to date, plus appreciation, will be treated as ordinary income when distributions are taken.
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Pick An Ira Provider For Your 401 Rollover
When moving your money, you need to figure out which brokerage will provide you with the services, investment offerings and fees you need. If youre a hands-on investor who wants to buy assets beyond stocks, bonds, ETFs or mutual funds, you need to look for a custodian that will allow you to open a self-directed IRA. On the other hand, if youre more hands-off, it might make sense to choose a robo-advisor or a brokerage that offers target date funds.
What About 401 To Roth Ira Conversions
A 401 is an excellent way to save for retirement through tax deductions today and tax-deferred growth until you start making withdrawals in retirement. However, with tax rates at historical lows today, many people want to take advantage of the current tax rules and convert their traditional 401 into a Roth IRA to have tax-free growth and withdrawals in the future.
While tax-free income is appealing, you will have to pay taxes on the amount you convert, and converting your 401 to a Roth IRA requires extra steps.
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What Are The Advantages Of Rolling Over A 401 To An Ira
Doing a 401 rollover to an IRA offers perks that can include more diverse investment selections than a typical 401 plan, perhaps cheaper investments and lower account fees. It’s also a way to keep your retirement funds organized and ensure you have easy access to them. And while some 401 plans pass account management fees along to the employees, many IRAs charge no account fees.
In summary, it’s a good way to save money, stay organized and make your money work harder.
Rolling Over Your 401 To A Traditional Ira Vs A Roth Ira
You have the option of rolling your 401 into either a traditional IRA or a Roth IRA. One isnt better than the other, and ultimately its up to you and your investment goals.
You do have to worry about a few things, though, and the major difference is this: Roth IRAs require after-tax contributions. If youre rolling over money from a traditional 401, then you havent paid taxes on that money as it came out of your salary before you got your paycheck. As a result, rolling your traditional 401 balance over to a Roth IRA will require you to pay income taxes on the entire balance in the year that you do the rollover. This could mean thousands of dollars in taxes. So just be cautious of this.
However, rolling a traditional 401 into a traditional IRA is easier, since both contain pre-tax dollars. You dont have to worry about triggering a taxable event.
On the same note, a Roth 401 and Roth IRA are both funded with after-tax dollars, meaning rolling one into the other wouldnt require a tax payment.
Paying income taxes by rolling a traditional 401 into a Roth IRA isnt necessarily a reason not to do it: Roth IRAs can be a powerful retirement savings tool, and some investors may prefer to pay the tax bill now for the benefit of withdrawing the money tax-free during retirement.
But whatever decision you make, its important that you understand the consequences and have your budget ready.
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You Expect To Earn More Money In The Future
If you plan to earn lots of money in the future or earn a high income now you should consider rolling your funds into a Roth IRA instead of a traditional IRA. For single filers in 2016, the maximum income allowable for contributions to a Roth IRA starts at $117,000 and ends at $133,000. Learn more about Roth IRA rules and contribution limits here. For married filers, on the other hand, the ability to contribute to a Roth IRA begins phasing out at $184,000 and halts completely at $194,000 for 2016. The more you earn in the future, the harder it will become to contribute to a Roth IRA and secure the benefits that come with it.
Contact Your Old 401 Provider
First, identify the provider of your old 401. If you aren’t sure who your old 401 provider is, the name should be on your account statements. If you have trouble finding this information, call your former employer.
Is your old 401 with Fidelity? If so, you can do the entire rollover through your NetBenefits®. account. You don’t need any additional paperwork, and the money can be directly transferred.
Is your old 401 with a different provider? If so, they will need to start the rollover process, so you’ll need to either call them or initiate the process online. They may need some paperwork, such as a Letter of Acceptance from Fidelity, or their own paperwork completed and signed by you or a Fidelity representative. If you have multiple accounts or employers, you may need more than one LOA.
Here are some questions to ask when you contact them. If you’d like to have a Fidelity rollover specialist on the line with you when you call, call us first at 800-343-3548.
Covington, KY 41015-0037
Do you own company stock?
If you have shares of company stock, it’s easiest to give us a call at 800-343-3548 and one of our rollover specialists can help you understand your options and take action.
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Should I Rollover My 401 To An Ira
You need to consider many factors, but it comes down to how you envision your retirement. Your 401 plays a key part in what kind of retirement you enjoy and it requires active participation on your part.
Lets take investment fees as one reason why you should consider a 401 rollover to an IRA. The average 401 plan charges north of one percent in fees.
Again, those seem small but over the course of a career that can significantly shortchange where you could be thanks to losing out on compound interest. Opening an IRA with Vanguard or a low-cost robo-advisor like Betterment or Wealthfront, on the other hand, helps you slash your fees and keep more of your money working for your retirement.
Lower fees are only one part of the two-pronged benefit of rolling over a 401 into an IRA. The other prong is countless investment options versus a small handful of funds typically found in most 401 plans. Together, those two prongs can put you on much better footing for obtaining the retirement you want.
How To Rollover A 401 To A Traditional Ira
When you want to roll over your 401 to an IRA, there are certain steps that you must follow to avoid penalties and to ensure that you don’t trigger a tax event.
Many companies proactively send out a letter informing an ex-employee of their retirement plan options, but not all do this. After you have left the company, you can request a rollover from the company’s retirement plan to your desired retirement plan.
There are three ways to complete a rollover:
Investors who transfer cash into their new retirement account must choose how to allocate their investments. Most IRA accounts offer a much greater variety of investment choices than a 401, so the process can be overwhelming for some investors. Many investors decide to choose investments on their own, while others benefit from having professional advice.
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How Do I Complete A Rollover
