401K to IRA
Rolling over a 401K to an IRA is more commonplace than some might think. Let’s take a look at
some of the ways this can be accomplished as well as the positive and negative drawbacks attached to planning such
a move.
Let’s assume you have a city job in which the employer offers a 401K plan. You have been contributing to it
for some time. Now let’s also assume that you retire before the age of 59½ but you decide that you want to control
the money that is in the 401K by rolling it over to an IRA.
The positive aspect of rolling over a 401K to IRA is that the money invested will still continue to compound.
But you must follow certain rules. Once you decide to rollover your 401K to an IRA you have to fill out the IRS
1099-R form. The money you receive has to be put into the IRA account within 60 days of receipt and the IRS must be
informed of the rollover by filling out form 5498.
The negative aspect is that you cannot withdraw the funds in your 401K account until you are 59½. If you
withdraw before that time, you will incur a penalty of 10%. In addition, to avoid paying a 20% tax upon rolling
over your 401K to IRA, utilize the direct rollover alternative by opening a traditional IRA account. A direct
rollover means that the administrator of your 401K account will send a check directly to the IRA account. In this
way, you do not have control of the check but save the 20% fee that most 401K administrators incur.
Later on you can decide to roll over your traditional IRA funds into a Roth IRA account. This, too, may require
some expert advice since there may be taxes incurred by the IRS. Talk to your account or bank where you intend to
have the funds transferred so that you can be sure there are no fees attached to the rollover.
Here is one more tip you should be aware of. Let’s assume you need to borrow money from your 401K. You can
borrow up to 50% of the funds, but must pay the loan within 5 years. Then you can roll over the funds to your IRA
account.
Most experts assert that 401K plans are worthwhile having since the funds are matched by the employer. As a city
employee, there are two areas in which you can contribute funds. One yields a higher rate of return while the other
offers a fixed rate of return. As you near the age of retirement, it may be worth your while to switch to the fixed
rate of return. This is especially true since the stock market is in a state of flux.
In any case, before you decide to rollover a 401K to IRA, speak to an expert on the subject.
Ascertain what the best course of action is for you, that is, one that does not incur any taxes or fees upon
rollover.
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