Moving a 401k to your individual retirement account is possible and could allow you to take advantage of some benefits that come with an IRA. The process of moving your money into an IRA is referred to as a "rollover." This is a common move when an employee leaves a job or no longer wishes to participate in a company plan.
Moving a 401k to an IRA is a necessary project for everyone who uses a 401k at some point. Once you reach retirement, you will have to roll your 401k into an IRA. Since you will no longer be working for your company, you cannot participate in the company retirement plan any longer. This means that you will have to put your money into another retirement account. Many people choose an IRA because it is simple to work with. You could also choose to transfer your money into an IRA at any point before retirement.
Opening an IRA
You'll need to open an IRA, if you don't already have one, before you can transfer your money from the 401k. There are many IRA providers. The process involves filling out some forms and providing the company with identification. Once your account is opened, the process of transferring your money can be initiated.
Transferring the Money
The process of transferring the money to your IRA needs to be handled by your 401k provider and your IRA provider. Some people will take a lump sum payment from their 401k provider and then handle the transfer to the new account personally. While you could do this, it can result in having to pay a 10 percent early distribution penalty if you do not get the money into the new account within 60 days. Also, for tax purposes, your provider must withhold 20 percent of the account, which will be refunded to you at the end of the tax year. The safer option is to fill out a form with your 401k provider and have it transfer the money to your new IRA.
One of the primary benefits of moving your money into an IRA is that you will have more investment options to choose from. Most 401ks have limited options that consist of mutual funds, stocks and bonds. By putting money into an IRA, you could invest in commodities, foreign exchange or even real estate. Before signing up with an IRA provider, look at the available investment options.
When changing your retirement plan from a 401k to an IRA, be aware of the contribution limits. With a 401k account, you can set aside much more money every year toward your retirement. For example, in 2010, the contribution limits for a 401k are $16,500 per year, while the limits for an IRA are $5,000 per year. You may need to adjust your monthly contributions so that you do not exceed this limit.
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