How to Effectively (and Safely) Rollover Your 401k

 

Converting the 401k from your previous job to an IRA can have numerous advantages such as no account fees, lower costs, a wider selection of investment options, and additional loopholes for early withdrawals. However, to maximize the benefits and minimize the drawbacks, it is imperative that you take the proper steps. Here’s how to accomplish a 401k rollover safely and efficiently.

Choose the IRA That’s Right for You

Traditional IRAs and Roth IRAs are both popular possibilities. The main difference between them is the way that they are taxed. If you decide on a 401k rollover to a Roth IRA, you have to pay taxes on the rolled amount. However, the upside is that after retirement at age 59 1/2 or above, all withdrawals from Roth IRAs are tax free. If you opt for a traditional IRA, your funds are not taxed at the time of the 401k rollover, but you pay taxes on withdrawals after retirement.

Open Your Account

When deciding on an IRA provider, the main consideration is whether you want to be a hands-off investor or actively manage your investments. Automated investment management services, also known as robo-advisors, prepare balanced portfolios for you based upon your personal preferences. Alternatively, online brokers allow you to select your own investments from a range of low-cost options.

Perform a Direct Rollover

When you initiate your 401k rollover, have the plan administrator from your former employer send the funds directly from your 401k account to your new IRA. If you withdraw the money personally and move it over to the IRA yourself in what is called an indirect rollover, it’s subject to a withholding percentage for the IRS, and the procedure to get those funds back is complicated.

Invest Your Money

Once you have completed your 401k rollover, you have cash in your IRA that is ready to be invested. Depending on the type of IRA you have chosen, either instruct your robo-advisor on how to invest, or make your own choices from among your investment options.

For more advice on 401k rollovers, contact Span Capital.