The Best 401k Rollover Options for the Self Employed

If you’ve recently left a job that offered a 401k rollover plan to be self-employed, you may be wondering what the best 401k rollover options are for someone in your situation. The first thing that you might want to do is to leave the 401k funds where they are, and this is an option, depending on the structure of your former employer’s rollover plan. However, most people want to maintain more control over their 401k plans, and this means transferring them to a different 401k or IRA.

The most common type of retirement plan that’s used by people who are self-employed is known as an SEP IRA.  SEP stands for Simplified Employer Pension plan, and it has been designed specifically for people who are self-employed or who own their own businesses.  This kind of plan allows participants to put up to 25% of their income each year into the account, with a limit of $49,000 – considerably more than traditional IRA or 401k contribution limits.  In addition, the SEP IRA allows you to deduct that amount from your yearly income, minimizing the amount you pay in taxes.

Some self-employed individuals may decide to go with a Roth IRA plan instead of an SEP IRA, but be aware that while this is possible, you can’t deduct the monies that are placed into the Roth IRA from your taxes.  However, when you retire and begin to draw on the money, it won’t be taxed, so you could actually end up saving money if taxes go up during this period.  If you decide to transfer funds from your existing 401k plan into a Roth plan, you will need to make sure that the taxes are deducted at the time of the transfer so that you don’t run into problems later on.

In addition, there are other 401k rollover options that you can consider if you’re self employed, but in order to make the right decision for your retirement goals, you’ll want to discuss all of the possible options with a financial advisor.  Tell the advisor what your long term plans are so that he or she can search out the IRA or 401k plan that will best fit your needs.  In fact, it may be possible to find a type of plan or account that you aren’t familiar with that can result in significant tax savings.

Once you’ve decided on the retirement plan that will work best for you, you’ll need to set up the 401k rollover to go from your existing account into the new plan.  The best method for doing this is through what’s known as a direct transfer or a direct 401k rollover.  In this type of transfer, the banks handle moving the money between accounts, so you won’t have to worry about the tax implications of your 401k rollover.  All you need to do is choose the IRA or 401k plan that will best suit you and your retirement goals, and then have the initial 401k plan transferred over to the new one.

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