There are two ways to handle a 401k rollover to an IRA. We will cover both options, the most common reason to transfer your money into an IRA and what will happen if you simply cash out your account instead.
A change in job status is a common reason to consider a 401k rollover to an IRA. The Employee Retirement Income Security Act of 1974 (ERISA) protects the assets of millions of Americans so that funds placed in retirement plans during their working lives will be there when they retire. This means that you are entitled to all of the money you’ve contributed into your 401k. In addition, your tenure determines how much of your former employer’s matching contributions you are entitled to. Chances are you are 100% vested if you have worked at the same place of employment for a few years.
If you were laid off and are looking for new job opportunities, you may not have a new 401k plan ready to receive the funds from your old 401k. In this case it makes sense to open an Individual Retirement Account (IRA). In addition, an IRA offers certain advantages when it comes to saving for retirement.
A traditional IRA allows you to invest pre-tax dollars and pay taxes when you withdraw. A Roth IRA allows you to invest after-tax dollars and pay no taxes when you withdraw. Once an IRA account is established, you may then choose how to use your money for investments or retirement income.
You may choose to leave your money in your old 401k account which is simple, but may not be the best solution in the long term.
If you receive cash for you old 401k without designating another qualified retirement account, your former employer is required to withhold and send 20% of your money to the IRS. If you do not deposit your money into a qualified retirement account within 60 days, you will have to pay taxes PLUS an early withdrawal penalty of 10% if you are under the age of 59 1/2. You will also have to come up with money out-of-pocket to make up for 20% that was withheld to the IRS. You will not be able to recover the money withheld to the IRS until you file your next tax return.
There are two options to choose from when you decide to roll over to your 401k into an IRA.
To learn more about your personalized options for a 401K rollover to an IRA, contact the financial experts at Annuity Watch USA.