Best Practices for 401k Rollover Success

Rolling over the 401k from your previous place of employment to an IRA has numerous benefits. You avoid taxes and penalties you would incur if you took the payout from your 401k in cash. Your account fees and other costs are lower. It’s possible to obtain penalty-free early distributions for higher education, first-time home purchase, and other qualifying reasons. You also have a wide range of investment options such as stocks, bonds, index funds, exchange-traded funds, and mutual funds. Here’s how to perform a 401k rollover in the safest and most expedient manner.

Select Your IRA

The main difference in the two most popular forms of individual retirement accounts is how they handle your taxes. If you choose a Roth IRA, you pay taxes on the rolled-over funds, but then after age 59 1/2 all your retirement withdrawals are tax-free. Selecting a 401k rollover into a traditional IRA means that you don’t pay taxes right away on the rolled-over funds, but you pay taxes on withdrawals after retirement. Each type of IRA account has its own contribution rules and limits.

Open an IRA Account

Once you’ve decided between a traditional or Roth IRA, open your account. It’s a simple process during which you provide some personal information such as your social security number and birth date. Look for a provider that meets your individual needs and has reasonable fees, good customer service, and low-cost investments.

Perform a Direct Rollover

When transferring the funds, be sure that the plan administrator from your former employer initiates a direct 401k rollover from your previous plan. This means that the check bypasses you and goes straight from your old 401k to your new IRA account. If you opt for an indirect rollover, which involves withdrawing the money and transferring it to the new account by yourself, you risk additional withholdings and taxes.

Invest Your Money

If you want to manage your own portfolio after your 401k rollover, open your IRA with an online broker and choose your investments. If you prefer to steer clear of investment decisions, consider opening an IRA that uses a robo-adviser investment service that manages your funds for you.

For more advice on 401k rollovers, contact Uraeus Capital Funding.

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