With employees changing jobs about every four years, there are many opportunities to roll over company-sponsored retirement accounts into an IRA. And yet, most employers do not provide information about when and how to transfer account funds.
The reality is if you have investments sitting in retirement accounts with a previous employer, and in some cases, with your current employer, there are compelling reasons to complete an IRA rollover.
This article addresses when, why, and how you can transfer retirement funds to an IRA.
Circumstances That Allow Rollovers
Most rollovers from a 401K or employer-sponsored retirement account occur after a job change or at retirement. You can also transfer investments from one IRA to another. In addition to these events, most employer plans also allow you to roll over funds even if you remain with the company.
Benefits of Rolling Over a 401k
Consolidation: An IRA can accept funds from multiple 401ks and the same type of IRAs putting most or all of your retirement dollars into a single account, making it easier to manage.
Flexibility with beneficiaries: IRAs allow more beneficiary options. You must follow the custodian rules but are likely to have more flexibility in naming beneficiaries.
Better diversification: One of the disadvantages of 401ks is the limited list of investment options. IRAs allow you to choose any investment not on the IRS list of prohibited transactions.
Can choose alternative investments: The IRA account custodian determines your investment choices. Banks offer IRA CDs, and broker-dealers allow you to choose from thousands of stocks, bonds, mutual funds, or ETFs.
Self-directed IRAs expand the list of possibilities even further to include a wide range of alternative investments, including real estate.
Ways to Rollover Your 401k
To complete a rollover, you can withdraw or transfer funds directly from one tax-advantaged account to another. Direct transfers are the safest way to avoid taxation because you never touch the money.
A withdrawal requires the redeposit of funds into another qualified account within 60 days to avoid taxation and possibly a penalty.
How to Rollover an Employer-Sponsored Account Into an IRA
Decide the IRA type: Choose the account type based on your current plan and the investments of interest. In most cases, you roll over pre-taxed accounts into a traditional IRA and post-tax funds into a Roth IRA.
What company will hold the funds: All IRAs require a custodian to keep the funds and send required reports to the IRS. The custodian or trustee could be a bank, investment firm, or company specializing in self-directed IRAs.
How do you want to invest the funds: Your investment preferences impact the choice of custodians. The custodian may be a financial institution when choosing to invest in CDs. Broker-dealers provide a platform for stock market investments, and self-directed IRA custodians hold alternative assets such as cryptocurrency, tax lien certificates, and real estate.
Utilizing the services of an account or tax attorney for self-directed IRA transfers can prevent inadvertently creating a taxable event.
Open the IRA Account: The type of investments dictate the account type. The account type narrows the list of possible custodians. You are ready to open and fund the IRA with these decisions made. The custodian assists with the transfer. Once the funds arrive in the new account, you can initiate a new investment.
To use IRA money for real estate purchases, you must fund a self-directed IRA. Learn more about using IRA funds to invest in commercial real estate syndications here.