In this video, we’re answering questions we’ve received about rolling over a 401k into an IRA – whether it’s a traditional or Roth IRA.

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Between mass layoffs and people quitting or changing jobs, there are a lot of people looking to rollover their old 401ks to IRAs. And, with that comes questions about the best way to do it without screwing yourself with penalties and taxes.

Intro
00:41 Direct vs Indirect Rollover
02:00 401k Rollover to Traditional IRA Taxes
03:38 401k Rollover to Roth IRA
04:38 Getting a 401k Rollover Check in the Mail
06:30 401k Rollover to IRA Count as Contribution?
07:05 When Not to Rollover 401k…(read more)

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For many people, their primary investment vehicle is their employer-sponsored 401(k) plan. However, there may come a time when they decide to leave their current employer, retire, or seek better investment options. In such scenarios, they would need to either leave their 401(k) plan behind or roll it over to an Individual retirement account (IRA). In this article, we will discuss the benefits of rolling over a 401(k) to an IRA and how it can help you avoid penalties and taxes.

Avoiding Penalties

One of the most significant advantages of rolling over a 401(k) to an IRA is avoiding penalties. If you withdraw funds from your 401(k) account before reaching the age of 59½, you will typically face a 10% early withdrawal penalty. However, with an IRA, you have more control. You can select investments that best fit your retirement goals and manage them as you please, without worrying about arbitrarily imposed limitations or penalties that come with 401(k)s.

Avoiding Taxes

When you withdraw funds from a 401(k), you are subject to ordinary income tax rates. This can significantly reduce the amount of money you will receive after retiring. In contrast, an IRA provides you with more flexibility when it comes to taxes. You can choose to roll over your 401(k) into a traditional IRA, which would allow you to defer taxes on the balance until you make withdrawals. Alternatively, you can roll over your 401(k) into a Roth IRA, which allows you to pay the taxes upfront but receive tax-free distributions in retirement. Either way, you have more control over your taxes than with a 401(k).

Lower Fees

Another benefit of rolling over your 401(k) into an IRA is the potential to lower fees. With 401(k)s, employers often pass on administrative and investment management fees to employees. Although individual investors might not face the same kind of fees in an IRA, they usually offer a broader range of investment options, allowing one to compare fees with different providers and choose a plan that works best for their budget.

Flexibility

An IRA also provides greater flexibility on how and when to withdraw funds. With a 401(k), you are generally limited to the investment options chosen by your employer, whereas an IRA allows you to direct your investments as per your interests.

In summary, rolling over a 401(k) to an IRA can offer many advantages, including avoiding penalties and taxes, reducing fees, and providing more flexibility. However, keep in mind that some employers might offer special plans with reduced tax implications; it makes sense to discuss this thoroughly with a financial advisor before taking any step in that direction.

All in all, consulting a financial advisor is advisable when rolling over a 401(k) to an IRA to ensure informed decision-making and greater security in your retirement-saving journey.