If you are changing employers and considering your retirement investment options, an IRA rollover from your 401k plan can be an excellent way to build your retirement nest egg. In fact, there are several different types of IRA rollover options available for individuals seeking to move funds out of their 401k plan. The type of IRA that meets your individual need and requirements will vary; however, all IRA rollovers offer significant tax savings and flexibility of choice.
A 401k plan has many advantages; however, you’re usually restricted to a predetermined set of investment options selected by your employer. In the current economic climate, where global credit markets are unstable and people are losing their retirement savings, an 401k rollover to IRA may represent the flexibility and security that you need.
How to Choose the Right 401k to IRA Plan
If you previously belonged to an employer-sponsored retirement plan, such as a 401k or 403b plan, you may not have even considered that there is a wider range of investment options available for you to choose from. Many people simply allow these old accounts to languish, but they could be doing much more for you as part of a 401k rollover to an IRA account. Depending on your circumstances, there may be several different types of IRA accounts that are eligible for your 401k rollover.
401k to SEP IRA
If you move your funds from your 401k to a Simplified Employee Pension IRA (SEP IRA), you’ll enjoy many different tax and profit benefits. This type of account must be set up by your employer, unless you’re self-employed. In this case, you can set up an SEP IRA and perform a 401k rollover to move your old funds to this new account. Your employer can also match contributions in this plan, making it a great tool for growing your retirement nest egg.
401k Roth IRA
A Roth IRA is a retirement savings plan that provides good tax incentives for people saving towards their retirement. For this reason, the Roth IRA is becoming an extremely popular investment choice for people moving funds from 401k to IRA accounts. Although you make after-tax contributions when depositing into this account, you won’t need to pay any tax when you withdraw from this type of account in retirement. Eligibility for a Roth is determined by your annual income.
401k to Traditional IRA
A traditional IRA is a personal savings plan that empowers you to save for your retirement. Contributions are tax deductible and the earnings that you make on any investments moved from your 401k to your IRA aren’t taxable. You can open a traditional IRA regardless of your yearly annual income; however, you are limited to a pre-set annual contribution amount. As an added bonus, your 401k distribution can be moved directly into this type of account without triggering any kind of 401k withdrawal penalty.
When considering whether or not a 401k rollover to IRA is right for you, keep in mind that an IRA account has different rules from your 401k plan. For example, you can only contribute earned income, not income from investments.
Different types of IRAs also have different restrictions – as an example, you can contribute only $5,000 to a traditional IRA, but up to $49,000 to an SEP IRA. They all have different rules and eligibility points as well, so refer to your financial adviser or the IRS website for more information before initiating a 401k rollover.