Long gone are the days when you’d work your entire adult life at a single job, build up a great pension after 30 or 40 years of service, then retire and live on those pension benefits. In fact, the U.S. Department of Labor estimates that the average American worker will change jobs every three and a half years.
Instead of offering pension plans, employers have shifted to offering 401(k) plans. With a 401(k) plan the obligations are now on the employee to contribute funds directly and to decide how to invest those funds. Employees are also responsible for eventually moving the funds when they change jobs. The process of moving funds out of an employer-sponsored 401(k) plans (usually to an Individual Retirement Account) is known as a “rollover.”
Here is some retirement advice on the relatively straightforward steps to performing an IRA rollover.
Have an IRA Account Available to Receive the Rollover Funds. The first step, of course, is to have your own IRA set up in order to receive the rollover funds. You can rollover your 401(k) funds into either a traditional IRA or a Roth IRA, but be aware that if you choose a Roth IRA you’ll be taxed on the full amount of the rollover.
Segregate Your Rollover Funds if Possible. It’s good practice to set up an entirely new IRA that will contain 401(k) rollover amounts exclusively. This is because it’s possible to roll the funds back from an IRA to a new employer’s 401(k) plan, provided that the IRA only contains funds that originated from one or more prior 401(k) rollovers. In other words, so long as you’ve only funded the IRA from 401(k) rollovers, and haven’t contributed anything into that IRA directly, then it’s possible to move those funds back into a 401(k) later. You might want to do this for example, in order to take advantage of some unique features that your new company 401(k) might have, such as the ability to buy company stock at a discount or take out loans against the 401(k) balance.
Select an Account Custodian to Fit Your Needs. There are many possible custodians for your IRA. Your local bank or credit union almost certainly offers custodial services, as do discount and full service brokerages. If you are interested in using your rollover funds for non-traditional retirement account investments (such as real estate or private company investments), then there are custodians who specialize in providing those services as well.
Multiple IRAs Can Have Value. Don’t worry about having to set up or maintain multiple IRAs for your rollover funds, your traditional IRA contributions and any Roth IRA contributions you’ve made. There might be a bit of an extra paperwork burden, but the tax benefits can easily make that burden worthwhile.
Don’t let your 401(k) funds stay at a prior employer simply because you’re intimidated by the prospect of having to move them. Take charge of your 401(k) and you’ll be in a better position to control your retirement funds.
Tags: 401(k) transfer, ira rollover, retirement advice