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What is a 401(k) Rollover?
A 401(k) rollover is a strategy to avoid current taxes by rolling old retirement plans into your own individual retirement account. We at Financial Planning Resources have very unique strategies specifically designed for a rollover. These strategies are flexible to meet your particular goals whether it be for protection, producing income, growth or a combination.
What is a 401(k) Rollover to a Traditional IRA?
When you rollover your 401(k) into a traditional IRA, you are changing the kind of retirement fund you have. You typically do a direct IRA rollover, which means that your 401(k) account provider directly wires the funds to your new IRA account provider.
If you prefer, your 401(k) account provider can write you a check, which you can then deposit into your new IRA account. In this case, the 401(k) rules require you to deposit the funds into your new IRA account within 60 days to avoid penalties or taxes.
What is a 401(k) Rollover to a Roth IRA?
This type of 401(k) rollover provides some tax benefits to retirement savers, especially those with high incomes that would otherwise preclude them from saving their money in a Roth IRA.
A Roth IRA rollover may also help you avoid the required minimum distributions (RMDs) that apply for Roth 401(k). Nonetheless, you may still incur taxes. Pre-tax monies and income makeup a traditional 401(k), so you will still owe taxes on the funds your rollover into your new Roth IRA, which is made up of after-tax contributions.
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What Is a 401(k) Rollover to Another 401(k)?
A rollover in this case involves transferring funds from one 401(k) plan to another. You might do this when you change jobs. A 401(k)-to-401(k) lets you keep all your investments in one place. It minimizes account maintenance fees and allows you to benefit from the Rule of 55.
What Are the Benefits of 401(K) Rollovers?
401(k) rollovers benefit you in three main ways.
1. Minimize Your Fees
401(k) rollovers can help you reduce your account administrative fees. It's a good alternative if your current employer's 401(k) plan limits access only to funds that have high expense ratios. On average, 401(k) fees can account for up to 0.96% of the entire investment portfolio.
Granted, fees such as expense ratios may be unavoidable. Still, administrative fees account for a sizable portion of the costs. Rolling your 401(k) over into an IRA or consolidating multiple 401(k)s may minimize these costs.
2. Expand Your Investment Options
A 401(k) limits your investment options to your employer's preferred investment vehicles, often a selection of mutual funds. Doing a 401(k) rollover into an IRA may give you access to other investments options, including bonds, stocks, ETFs, and real estate. Self-directed IRAs, in particular, give you even more control.
3. Consolidate Your Accounts
Some people have multiple 401(k)s from different employers they've had during their career. Multiple 401(k)s can be burdensome to monitor and the account fees can add up and erode your investment returns. Using 401(k) rollovers to merge the accounts into one unifies your investments, making it easier and less costly to manage.
If you are considering a rollover, remember your four main options:
Financial advisors recommend 401(k) rollovers in many cases because they make it easier to manage your investment portfolio and reduce the fees you pay for your retirement account. Visit Financial Planning Resources and learn more.