How to Roll Over Your 401(k) to an IRA

When you change jobs or careers, you may be faced with the decision of what to do with your 401(k). You can leave your investments in your former employer’s plan, where they’ll continue to grow without your additional contributions. However, if you’re not going to have access to a 401(k) going forward but still want to save for retirement, rolling your account over into an IRA could be a viable move.

Choosing an IRA

The choice between a traditional IRA and a Roth IRA is crucial. Traditional IRAs are tax-deferred, meaning you pay taxes on the money when you withdraw it. On the other hand, Roth IRAs are funded with after-tax dollars, offering tax-free withdrawals in retirement.

In 2024, the annual contribution limit for IRAs is $7,000, or $8,000 if you’re 50 or older. If you’re rolling funds over from a pre-tax 401(k) to a Roth IRA, be prepared to pay income taxes on the transferred amount.

Executing a Rollover

Once you’ve chosen the type of IRA and the financial institution where you’ll keep your account, setting it up is straightforward. Contact the company managing your 401(k) and request a direct rollover to your new IRA to avoid penalties.

A direct rollover from a 401(k) to a traditional IRA typically incurs no taxes. However, rolling money over to a Roth IRA from a traditional 401(k) will trigger a tax event since traditional 401(k)s are pre-tax and Roth IRAs are post-tax.

If you opt for an indirect rollover, be aware that the IRS may withhold 20% of your funds for taxes. That means you’d have to cover the rest yourself. Failing to deposit the full amount, including the withheld portion, into your new IRA within 60 days can result in penalties. In short, a direct rollover will be a much easier and less stressful option if it’s possible for you.

Recapping the Rollover Process

When doing a 401(k) to IRA rollover, decide between a traditional or Roth IRA based on your tax situation and retirement goals. Then, initiate the rollover by setting up the appropriate IRA and coordinating with your 401(k) plan provider for a direct transfer to avoid taxes and penalties. Explore IRA options for your 401(k) rollover. Click here to call