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How to Roll Over Your 401k to an IRA Without Stress

Find out if the move is right, and find out how


Even though the unemployment rate has improved from 2009 peaks, it is still pretty darn high. While there are various concerns for folks in such a situation, it can be easy to ignore your 401k investment funds and the prospect of an IRA rollover. After all, figuring out exactly what an IRA is and how to roll over your investment funds can be intimidating.

How to roll over your 401k to an IRA may seem like a low priority — but it is still important to think about.  A key reason is that an IRA will provide much more flexibility in your investment options.  And even though you may be able to justify the lack of a rollover while you are out of work, once you find a new job it will be a very good time to change your investing strategy.

Here’s why:

IRA Investing Offers More Options

For many employers, a 401k plan only offers a handful of mutual funds.  Unfortunately, it is not uncommon for them to be poor performers.

Keeping your old 401k investments also means you will not be able to make new contributions. Besides, do you really wantto remain in contact with your former employer?

And another issue is administration fees and other charges.  They can be significant for a 401k plan, and an IRA rollover gives you more options.

When Is an IRA Rollover a Bad Idea?

There are some instances when it makes sense to keep your old 401k, however. A common reason is to be able to borrow against the assets.  Of course, this can be a good option for someone who thinks that unemployment will be long-term.

How to Roll Over Your 401k

If you decide to do a rollover, the good news is that the process is simple.  Any of the top mutual funds and brokerage firms provide you with the necessary forms.  Or, you can apply online.

If you use a self-directed IRA, you will be able to have many investment choices.  Besides having mutual funds, you can also invest in exchange-traded funds (ETFs), stocks, bonds and CDs.

But there are some things to consider.  First of all, ask about the fees.  Actually, some firms are known to have low costs, such as Vanguard.

What’s more, you should use a direct rollover.  Why?  Well, if not, your employer will need to withhold 20% in federal income taxes.  In fact, there may even be a 10% early-withdrawal penalty (if you are under 55).

Once your money is in an IRA, you will get some nice tax benefits.  That is, the earnings in the account — whether from dividends, interest and capital gains — will grow tax-free.  You will not have to pay Uncle Sam until you make withdrawals.  If you do this before reaching 59 ½, there will be a no 10% penalty.

You can also make additional contributions to the account, which may be tax deductible.  If you’re under 50, the maximum amount is $5,000 of earned income and after this, there is an additional $1,000.

Interestingly enough, it is also possible to rollover money into Roth IRA.  With this vehicle, your withdrawals are not subject to taxes.  There are also no mandatory withdrawal requirements (a traditional IRA forces you to start taking your money out when you reach 70 ½).  However, in exchange for these benefits, the contributions are not deductible.

As to whether you should go with a traditional IRA versus a Roth IRA, the decision is complicated.  It depends on your expected tax situation when you retire.  There may even be considerations for estate planning.  But, if you do a Roth conversion, you will need to pay taxes on the distribution.  Needless to say, this can be a tangled process, in terms of calculating your income, credits, exemptions, deductions and so on.

So in light of the various rules and tax issues, it is a good idea to take some time to think about your options.  More importantly, it makes sense to seek out professional advice, especially from someone who understands the tax implications of rollovers.

Article printed from InvestorPlace Media,

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