No matter your chosen field, it’s likely you’ll leave at least one job, if not more, with a balance of 401(k) funds to your credit. When that happens, “it pays” to consider a roll-over of those funds from the employer into an independent IRA. A popular retirement investment planning strategy, if done correctly, a rollover of funds into an independent IRA will allow you to avoid paying taxes on the money until you withdraw from the new plan. This plan will help you save for the future by continuing to grow the balance tax-deferred and offering access to more investment options. But, before you get started, don’t allow your employer (or previous employer) to cut a check in your name, and don’t cash out. In both cases, you’ll risk paying income taxes off the top.
With that said, here are the ways you can complete a rollover, according to the IRS.
1.) Direct rollover – If you’re getting a distribution from a retirement plan, you can ask your plan administrator to make the payment directly to another retirement plan or to an IRA. Contact your plan administrator for instructions. The administrator may issue your distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
2.) Trustee-to-trustee transfer – If you’re getting a distribution from an IRA, you can ask the financial institution holding your IRA to make the payment directly from your IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
3.) 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to you, you can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan, so you’ll have to use other funds to roll over the full amount of the distribution.
Please note that Option #3 calls for federal income tax to be withheld (currently 20%). There may be cases in which having the distribution paid directly to you make sense, but we recommend Options #1 and 2 as better choices for retirement investment planning.
How do I choose an IRA provider? Finding the best match depends on whether you prefer to actively manage your investments or prefer to be hands-off. For active management types, you may wish to work directly with a professional who can help you build a portfolio that you can manage. For hands-off investors, a financial planner or investment software can assist you in choosing an IRA provider that reflects your preferences.
Should I choose a Roth IRA or a Traditional IRA? These investment accounts vary greatly in tax treatments. If you expect higher taxes in retirement, a Roth IRA may suit you best. If you expect lower taxes, a traditional IRA could be a better bet.
At Tax Savings Professionals, we have worked with thousands of clients to help them craft financial and tax planning strategies over the past 18 years, and we are here to answer any questions you may have. Give us a call at (772) 257-7888 or click on our contact form today.