Rollover 401k IRA Options – What You Need to Know

There are so many different options for 401k rollovers that you might find yourself feeling stressed about the type of account you should open or how to best complete the transfer. The key to taking care of your 401k to IRA rollover is to first decide on what kind of IRA you want to open. This will depend on your current work situation and several other important lifestyle factors. Before you even begin to worry about how your 401k rollover will occur, you’ll need to sit down and decide on the kind of rollover account you want to open.

If your current employer offers a retirement program, you might want to complete a 401k rollover distribution to this new account.  This can be done in one of two ways.  First, you can request a direct transfer, in which the money is moved directly from your existing 401k account into your new retirement program.  If the target IRA is a qualified one, no taxes should come due on the money that you’re moving.

Your second 401k rollover option is an indirect transfer.  In this case, a check is issued to you for roughly 80% of the total of your former 401k account.  Once the check is issued, you have only 60 days to deposit the money into the new IRA account, according to current IRS statues.  Once the 401k rollover is confirmed, the remaining 20% of your account balance will be released into the new account.

If you don’t have a retirement plan under your current employer – or if you aren’t satisfied with the performance of this account – you’ll need to go through the different types of privately held IRA plans that are available today to find the one that will best fit with your needs.  For example, there are plans that are specifically designed for those that are either self-employed or who own a small business, as well as others that are open to those people who meet certain income restrictions.  Other types of IRA – like the traditional IRA – are available to everyone.

If you’re self-employed or own a small business, you’ll most likely want to look into opening an SEP IRA to receive your 401k rollover because it allows you to make larger tax deductible deposits than other types of retirement accounts.  You can also go with a traditional IRA, although this will limit the amount of income you can deposit and write off each year significantly, compared with the limits placed on an SEP IRA.

On the other hand, if you have a full time job, but your employer doesn’t offer you a retirement plan, you can go with either a traditional IRA or a Roth IRA.  These two plans are widely different.  The traditional IRA, for example, will allow you to claim the money that is deposited as a tax write off, whereas the Roth IRA will not.  Additionally, contributions to Roth accounts are made with after-tax funds, compared with traditional IRA contributions that are made before taxes are taken out.

This means that if you rollover 401k into Roth IRA, you’ll have to pay taxes on the money that’s already in this account.  The tradeoff, though, is that when you withdraw the money later in life, you won’t have to pay taxes on your withdrawals.  Because of the differences between the Roth and the traditional IRA and their tax implications, you may decide to hold a 401k rollover account that’s a traditional IRA, while making any new deposits to a Roth IRA account.

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