401k Rollover Options – What Types of Accounts Will Accept Your Funds?

As you’re probably already aware, there are several good reasons to perform a 401k rollover to IRA. However, most of the time, you’ll be considering rollover options when you’re changing jobs or have access to a new IRA that you’ve opened as an individual. Be aware, though, that not all IRAs can accept funds from your 401k account, so you’ll need to do some research before initiating 401k rollover options.

It would be natural to ask why a new account can’t or won’t accept your money.  Money is money, after all – right?  Well, not really.  Different IRA accounts are set up according to different laws and regulations that affect the tax status of the money.  For example, the money may have been taxed already, or it may be invested in a tax deferred state.  You don’t want the IRS to tax the same money twice, while at the same time, the IRS won’t let you have money without taxing it.  Remember that IRAs aren’t a way to get tax free money.  Instead, they’re a way to defer the taxes to a better time for you and to promote savings, which is what the IRS wants.

Once you start a new job, you may have little or no choice about what type of account your new IRA will be.  For example, your employer may offer a Simple IRA, a SEP IRA or a traditional IRA – and each of these account types have different rules for accepting 401k rollovers.  If, on the other hand, you have the chance to open your own IRA, be sure to select a target IRA that will be able to receive funds from your 401k plan.

One general rule to keep in mind is that like accepts like.  For example, if you’re doing a 401k rollover to another 401k account, there shouldn’t be an issue – your money will maintain the same tax status throughout the transfer.  In the case of 401k rollovers, you can also move your funds to a traditional IRA, an SEP IRA, a 403b account or a 457b account (as long as it’s a separate account) without incurring a potential tax burden.  The only exceptions to the rule are Simple IRAs and Roth 401ks, which cannot receive funds from a 401k rollover.

In addition, a Roth IRA can also accept a rollover from a 401k account; however, if you move money from your 401k to a Roth IRA, you will have to pay taxes on the money that is being rolled over.  This is because money invested in Roth IRA accounts is invested after taxes have already been paid, while money in your 401k account has not yet been taxed.  As the IRS won’t let you get away without paying taxes, the money you remove from your 401k plan must be taxed before it can be added to a Roth IRA.

If you have any questions regarding your eligibility for different 401k rollover options, contact the managers of your target account – they will be able to tell you if the rollover can be completed as requested.

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