Just like you need to be careful while investing into an 401 (k), you need to be cautious if and when you decide to rollover your 401(k) to IRA. Though the reasons behind it may vary from leaving a job for a new one or choosing to lead a retired life at your own choice, what remains irrevocably the same is the tax implications that it can have. The good part is that this comes with the freedom to choose how to rollover 401k into IRA. But since with great freedom comes great responsibility you must choose wisely.
How to Do a 401k Rollover?
Once you have decided to do a 401k rollover, you will have infinite options on how to proceed. These can be grouped into two categories that you have to choose from. These depend on how the funds from your 401k plan are paid to you can be broadly divided into:
- Direct Transfer:As the name suggestions, this involves a direct transfer of your funds from your present plan to your next investment plan. Herein, you can ask your account manager to directly transfer the funds either to your new 401k plan or to the new investment options. Since the funds are directly transferred it saves you from any kind of tax implications
- Indirect Transfer:Here, the amount is given to you in cash which you can use to invest in a new plan. This must be done within 60 days or may call for consequences where tax will be levied. Some employers may issue the check in the name institution/person with your new account, Since a check is issued for your account, the employer may have the right to hold up to 20% of your funds. Although it may be considered a direct transfer but should be accomplished within 60 days to avoid any consequences.
After you have successfully chosen the kind of transfer you want to go for it becomes very easy to roll over your 401 (k). This can be easily done by following the below steps.
- Pick the right provider you want to roll over your 401k into. This could be a bank, online wallet, a person or a new employer where you will start your new IRA plan
- Inform your IRA administrator about rollover and ask for a direct transfer.
- Choose your new investment options as the funds will be given to you as cash.