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A 401(k) rollover is a transfer of money from an old 401(k) to an individual retirement account (IRA) or another 401(k).
In what scenario would you consider doing a 401 (k) rollover? When you leave a new job to start a new one. If you decide to do a 401(k) rollover, typically the money from an old 401(k) must go into the new IRA account within 60 days.
There are four steps to do a 401(k) rollover into .
A 401(k) rollover to an IRA may give you more investment options and lower fees than your old 401(k) had.
You generally have two options for where to get an IRA: an online broker or a robo-advisor. Which option you choose depends on whether you're a "manage it for me" type or a DIY type.
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These two words — "direct rollover" — are important: They mean the 401(k) plan cuts a check directly to your new IRA account, not to you personally.
Here are the basic instructions:
If you do an indirect rollover, the plan administrator may withhold 20% from your check to pay taxes on your distribution. To get that money back, you must deposit into your IRA the complete account balance — including whatever was withheld for taxes — within 60 days of the date you received the distribution. (The exception to this is if you want to open a Roth IRA, which will require taxes paid on the distribution, unless your money was in a Roth 401(k).)
For example, say your total 401(k) account balance was $20,000 and your former employer sends you a check for $16,000 (that’s the full account minus 20%). Assuming you’re not planning to go the Roth route, you'd need to come up with $4,000 so that you can deposit the full $20,000 into your IRA.
At tax time, the IRS will see you rolled over the entire retirement account and will refund you the amount that was withheld in taxes.
Once the money is rolled over into your new IRA account, select your investments.
A 401(k) rollover is often used when you leave an old job to start a new one. Although you can sometimes keep your old 401(k) with an old employer, you have the option to roll the funds into an IRA. This is a way to keep your retirement funds organized and ensure you have easy access to them. Another alternative is to move the funds from your old 401(k) plan into your new employer's retirement plan.
Doing a offers perks that can include more diverse investment selections than a typical 401(k) plan, perhaps cheaper investments and lower account fees. And while some 401(k) plans pass account management fees along to the employees, many IRAs charge no account fees.
In summary, it's a good way to save money, stay organized and make your money work harder.