401k to IRA Rollover

You may decide to do a 401k to IRA Rollover at some point in time. Making a 401k rollover into an IRA plan can be complicated, so I will try to explain it a little bit.

Before we get into how this works let’s look at why an individual may want to rollover a 401k to an IRA.

1. Leaving Current Employer

The most common reason for creating a 401k to IRA rollover is because they employee is leaving the employer and wants to switch their plan from their employers 401k to another investment plan.

2. More Investment Options

One major difference between IRA and 401k plans is that IRAs will normally offer more investment options.

3. Less expenses

IRAs typically have fewer expenses then 401ks, but an employee should look at their plans just to be sure.

4. Self Directed

Many IRA plans will let you direct your plan yourself. So if you want more control over your investments you can rollover your 401k to a self directed IRA.

How a 401k to IRA Rollovers Work

An employee can choose to do a 60 day rollover in which they receive assets from their 401k and have to deposit it into their IRA before the 60 days is up. If the individual holds it longer than 60 days then that money will be treated as a 401k withdrawal and it will be subject to any taxes or penalties that may come with taking out a withdraw.

There are a lot of disadvantages with doing a rollover.

For starters this can only be done once every 12 months. If you find yourself in a rare situation where you need to do this more than once in a short period of time, you are out of luck.

The other disadvantage is that you only receive 80% of the money when doing a withdraw. The other 20% is kept into the account to pay for potential taxes. But you still need to deposit the full amount into your account.

So if you have $100,000 in your 401k and do a rollover you would be given $80,000 and expected to deposit the full $100,000 into the IRA. You either need to come up with the extra $20,000 or it will be considered a 401k withdrawal.

You may be able to get the remaining 20% that was withheld from your account back when you do your taxes, so the money isn’t gone, just withheld.

Trustee to Trustee Transfer

Doing a 401k rollover into an IRA can be a little difficult and complex. An easier method would be to have your employer transfer the assets from your 401k directly into your IRA. This way all of the money is transferred automatically and it can be done many times throughout the year.

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