Discover the benefits an IRA has to offer!
If you want more flexibility in how you invest your hard-earned money, then moving your 401(k) to an IRA could be the right choice for you. IRAs offer advantages including special federal tax laws governing the taxation of amounts earned within an IRA.
Of course, there are pros and cons you need to weigh, but the simplicity and potentially lower costs of an IRA should have you asking the following questions:
Do I know the tax liabilities and incentives between traditional and Roth?
Both traditional and Roth IRAs provide generous tax breaks. But it’s a matter of timing when you get to claim them. Traditional IRA contributions are tax-deductible on both state and federal tax returns for the year you make the contribution, while withdrawals in retirement are taxed on ordinary income tax rates. Roth IRAs provide no tax break for contributions, but earnings and withdrawals are generally tax-free. So with traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.
Direct or indirect rollover?
With a direct rollover, you instruct your former employer to send your 401(k) directly to your new IRA—and you never have to handle the money yourself. With an indirect rollover, you start by requesting a lump-sum distribution from your plan administrator and then take responsibility for completing the transfer.
Indirect rollovers can have significant tax consequences because the plan is required to withhold 20 percent to ensure that taxes will be paid if the rollover is not completed. Funds must be deposited into an IRA within 60 days to avoid taxes—and to avoid the potential of an additional 10 percent tax penalty if you are younger than 59½.
Are there any fees?
Even if there are no costs associated with a rollover itself, there might be costs related to account maintenance, investment management or both. Many financial institutions may claim “no fees” or “free” but always check the fine print. Don’t hesitate to address important items such as tax implications, differences in services, and fees with your financial counselor.
Should I consider my age?
If you leave your job between age 55 and 59½, you may be able to take penalty-free withdrawals from an employer-sponsored plan. In contrast, penalty-free withdrawals generally are not allowed from an IRA until age 59½.
Ask yourself these questions and assess your options. Probe your financial counselor or institution and do your homework to determine what is best for you. The decision to move your retirement nest egg or stay put is an important one. So remember as with any investment, if you don’t understand it, don’t buy it.