Considering an IRA Rollover? Know What Your Options Are First

Have you been contributing to a 401(k) plan but are no longer working for the employer due to job change, downsizing or retirement? If so, you should strongly consider moving those assets to an IRA rollover account.  Here are the options to be aware of so you can make a well-informed decision.

The IRA rollover is an account designed to receive retirement assets rolled over from an ex-employer’s retirement plan such as a 401(k).  The IRA rollover allows funds to be transferred tax free and penalty free from other retirement plans and allows those assets to continue to grow tax deferred until retirement.

There are two types of IRA rollovers:

Indirect Rollover:  Once you have selected the financial institution you want to open your IRA rollover with, you can elect to take a cash distribution from your original 401(k) plan and then deposit the money into your IRA within 60 days.  Your employer is required by law to withhold 20% for prepayment of federal income taxes.  However, in order to avoid taxes and penalties, the entire distribution amount (including the 20% withheld for income taxes) must be deposited into your IRA.  If any amount, including the 20% withholding, is not rolled over within 60 days then that amount will be subject to taxes and possible IRS penalties.

Direct Rollover: With this option, you give your employer authorization to make your check payable directly to your new IRA custodian (the financial institution you opened your IRA account with.)  Under this option, there is no tax withholding, no taxes or penalties. Your retirement savings will continue to grow tax-deferred. 

If you do not move your assets from your 401(k) to an IRA rollover, you can leave them in your former employer’s plan and do nothing or you can transfer the funds to your new employer’s retirement plan if they offer one. However, you need to check your new employer’s plan rules as they may not allow you to transfer money in.  

Alternatively, you can cash out of your 401(k) completely and pay IRS taxes and possible penalties, and keep the balance for yourself.  However, this option is usually not advisable since you could lose 50% or more to taxes and penalties if you go this route.

If you have a 401(k) with a previous employer, you should strongly consider transferring those funds into an IRA rollover because you will have control over your retirement account.  If you leave your assets in your former employer’s plan (or transfer them to your new employer’s plan) and if either company should undergo financial troubles, you don’t want to have to worry about the problems that could arise with your retirement account.  

Ultimately, you should be the one in control of your own money and you can gain some of that control back with an IRA rollover.  Look for the best possible ways to protect your assets and generate higher returns on your retirement income.

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