Any time you’re trying to decide what to do with an old 401k from a former employer, you’ll want go over all of your 401k rollover options in order to find the right one for your retirement future. Most of the time, the funds can be rolled over to an account with your new employer, but this may not be possible if you’re dealing with specific IRA accounts. For example, if you’re looking for options to moving your 401k plan, but your current employer offers a Simple IRA, then this isn’t going to be a possibility – you can’t make a 401k rollover into a Simple IRA unless it originates from a Simple IRA.
However, there are a number of other retirement plans that your employer might offer you that would allow you to complete a 401k rollover. You will, of course, need to make sure that the structure of the new account will allow for your 401k investment to be moved. In addition, you’ll need to decide what kind of transfer option you want to use to complete the transaction. There are two types of transfers that are used when completing a 401k rollover – direct and indirect.
With a direct transfer, the money is moved between banks and no taxes are withheld. But with an indirect transfer, the money is issued to you in the form of a check, although you’ll notice that 20% of the total 401k funds will be withheld to balance against potential taxes if you fail to deposit the funds into another qualified plan within 60 days. If you take the 401k distribution and place it into an eligible retirement plan, then the 20% will be moved into the new account. If you want to avoid any potential mistakes and the loss of 20% of your account balance to taxation, it’s best to use a direct transfer so that everything is handled for you.
If you’re planning on moving your 401k to Roth IRA, know that taxes will be assessed on your 401k funds; unless your existing account is a Roth 401k (these are rare). The reason for this is that the money in your 401k was taken out of your check before taxes were paid, but in a Roth IRA, all of the monies in the account have already been taxed. The difference is that when you retire and draw funds out of a Roth IRA account, you won’t have to pay taxes. To avoid any problems with the IRS, 401k funds will need to be handled by someone who can deduct the appropriate taxes and report them when they’re moved to the Roth IRA account.
One of the best ways to avoid mistakes when you’re deciding on your 401k rollover options is to discuss all of your choices with a financial advisor. He or she can help you to find a way to make the most out of your 401k investment. By working through all of your options, you’ll be able to find the one that will work best for your current work environment and your future retirement plans.