If you switch employers or lose your job, you may wonder how to handle an IRA rollover. The good news is that there's no rush to complete the 401(k) rollover to IRA. However, you won't be able to contribute to your 401(k) while it's under your former employer's management.
"Rolling over" your 401(k) involves moving the money to a new retirement account. Typically, this means rolling the tax-advantaged funds into your new employer's 401(k) or into an individual retirement account.
Most 401(k) retirement plans come from pre-tax funds and are rolled into a Traditional IRA (designed for pre-tax income). However, a 401(k) rollover to Roth IRA may count as income since a Roth IRA consists of post-tax earnings. Ask your financial advisor how you can avoid rollovers with tax implications.
You don't have to roll over your 401(k) after leaving a job. However, you won't be able to make additional contributions unless you roll it over into a new individual retirement account.
There are three choices when it comes to rolling over your 401(k):
There are no monetary limits to how much you can roll over from a 401(k) to a traditional or Roth IRA.
If you choose not to roll over your 401(k) and receive your payment. It may result in a 10% penalty and subject your payment to taxes.
It's always a good idea to work with a financial advisor before making major life changes impacting your finances. Financial advisors know the 401(k) rollover to IRA rules because they deal with them every day. By working with a professional, you gain an ally who can explain the consequences of any decisions that you may make. This is very important because making the wrong decision can have serious tax implications or subject you to an early withdrawal penalty.
When you meet with your financial advisor, bring a list of questions regarding your 401(k) rollover to IRA plans. Now is also a good time to ask any other questions you have about your retirement or other financial goals.
Your financial advisor can suggest a variety of plans that meet your retirement goals. They can also explain whether a 401(k) rollover to Roth IRA makes any sense for your specific situation.