If you have changed jobs or retired recently, you may be wondering what to do with your 401(k). Your options may include leaving it with your former employer, if they allow you to, transferring it to your new 401(k), again if your new employer accommodates this, rolling it over into an Individual Retirement Account (IRA), or taking it in cash. The last option is typically not recommended, as you will have to pay taxes on the distribution at your current tax rate, and depending on your age, you may have to pay an additional 10% for early withdrawal.
Why transfer assets to an ira?
For many, rolling your 401(k) assets into an IRA is the most favorable action, for the following reasons:
TAX BENEFITS
Assuming you roll it directly into an IRA or take the proceeds and then use it to fund an IRA within sixty days of receipt of the proceeds, your transaction is not subject to taxes, and your funds will continue to grow on a tax-deferred basis.
CONVENIENCE
You may be able to consolidate your individual retirement savings accounts into one account, which makes it easier and more convenient to track and manage.
INVESTMENT CHOICE
You will likely have a wider range of investment choices, as 401(k) plans generally have a set menu of funds from which to choose. If you roll over into an IRA, you may be able to select from funds, ETFs, and individual securities, depending on the IRA features.
ACCESS
With an IRA, you can generally transact whenever you want and easily view your IRA online at any time, without having to go through ad administrator or complete paperwork.
CONVERTABILITY
Once you have rolled your IRA over, depending on eligibility, you may be able to convert it to Roth IRA (if you have Roth 401(k), you can roll directly into a Roth IRA). While the contribution is taxable at the time you convert, there are not taxes on withdrawals, which may be beneficial if you think you may be in a higher tax bracket when you are taking withdrawals.
ESTATE PLANNING
If you roll your 401(k) over into an IRA, make sure you have designated beneficiaries, and that they are up-to-date and reflect any changes in circumstances, such as marital status or dependents. While your IRA is still considered part of your estate, if beneficiary designations are in place, you avoid probate on these assets.
A SageSpring advisor can help you determine which option is most appropriate for you. As always, feel free to reach out to us with any questions you may have. For more information on 401(k) and IRA rollovers, visit Investopedia.com
