When it comes to a 401k account, you have a few options while you are changing your jobs. One of the best options to choose here is a 401k rollover to IRA (Individual Retirement Account). You should choose this option rather than cashing it out, for which you will have to pay taxes as well as a withdrawal penalty. If your employer gives you a 401k plan, then you can transfer it. 

In this article, you will learn about how 401k rollover to an IRA account happens. You will find out whether it is okay for you to do a 401k rollover to an Individual Retirement Account. Apart from that, we will give you some reasons why you should consider rolling over your 401k account to an IRA. Hence, to learn more about this rollover method for retirement accounts, read on through to the end of the article.

What Is A 401k Rollover?

If you are close to your retirement or if you are changing jobs, you might consider what to do with your 401k account. The 401k account allows you to invest your money and get income within the account.

According to Nerdwallet.com, “A 401(k) rollover is when you take money out of your 401(k) and move those funds into another tax-advantaged retirement account. Many people roll their 401(k) into an individual retirement account or IRA. But you may also be able to roll your balance into another 401(k). You have 60 days from the date you receive the cash or assets from your 401(k) to put it into another retirement plan.”

You can also choose the direct rollover option instead, which allows your money to go directly into the new account, just like a money transfer. This is the easier and safer option, and you should always choose the direct method.

401k Rollover To IRA: Is It A Good Thing To Do?

According to The Motley Fool website, “Both a 401(k) and IRA are tax-advantaged retirement accounts, but they work differently. 401(k)s are sponsored by employers and often offer limited investment options. IRAs aren’t linked to employment. They can be opened with any brokerage firm or other financial institution and have a wider variety of investment selections, but they require more hands-on management.”

Basically, employers offer the 401k account to employees. Hence, once you leave your job, you will have to determine what to do with the money in your 401k account. If you want to discontinue your 401k plan, and your new employer does not offer a 401k plan, you must consider rolling over your 401k to an IRA (Individual Retirement Account).

However, if you are not already 59.5 years old, you will have to pay a 10% penalty for withdrawing your money from your 401k account. Hence, you must consider rolling over your account to an IRA, as it does not require any penalty or any hefty investment. Apart from that, there are no tax consequences as well. However, if you roll over to a Roth IRA< you will have to pay a tax.

You can also choose which brokerage you want to hold your retirement funds if you roll over your 401k to an IRA. However, a downside is that you will not get the option to borrow against your retirement fund with an IRA, which was present in the 401k system.

A Few Reasons Why You Should Do A 401k Rollover To IRA?

According to Investopedia, “Rolling your 401(k) over to a new employer’s plan is the easiest option. If you really like the new plan, go for it. However, rolling it over into an IRA account will give you many more investment options than your employer’s plan. You may also find an IRA with lower or fewer fees.”

The following are the major reasons why you must consider rolling over your 401k account to an IRA:

1. You Will Get More Choice Of Investment

401k plans offer you limited investment choices, which only your employer and the financial provider choose. With an IRA, you have more options to choose your investments.

2. You Will Get The Chance To Communicate Better

You cannot communicate better if you leave your 401k account with your previous employer. Rolling your money over to an IRA will give you the option to have better control over your money.

3. Lower Costs And Fees

If you roll your money over to an IRA, you can reduce the management and administrative fees that you are paying for your 401k. Furthermore, the funds from 401k are also more expensive.

4. You Can Convert To A Roth

You can do a rollover to only a traditional IRA as per the rules of 401k. Hence, you will need to first convert to a traditional IRA and then shift it to a Roth IRA. To strategize on how to do it, consult with your financial advisor.

5. No Complicated Rules

The rules of 401k are difficult for even professionals. In contrast, the rules of the IRA are set up by the Internal Revenue Service (IRA). Furthermore, there are simpler rules when it comes to taxes on distributions.

6. Advantages Of Estate Planning

There are more payout options with the IRA, which is not the case with 401k. With an IRA, there shall be no income and inheritance tax headaches that your beneficiaries will get.

Final Thoughts

Hope this article was helpful for you to give you a better idea of whether to do a 401k rollover to IRA. You can see from this article that if you roll over your 401k account money to a new IRA, you will get the benefit of avoiding immediate taxes. Apart from that, your retirement money will also get the chance to grow tax-deferred. You will also get more investment chances.

Basically, in an IRA, you will have more control over your money, as opposed to a 401k account, and you will have the ability to buy and sell anytime you want. Do you have any more suggestions about how to do a 401k rollover to IRA? Share your ideas and opinions with us in the comments section below.

Read Also:

• Form 940 – How To File? And Is It Important?
• Form 941 – How To File Quarterly Tax Returns?
• Form 944, Employer’s Annual Federal Tax Return