The future is always uncertain, which can be stressful to think about. However, a 401k is a plan that is provided by an employer to help the employee save for their retirement. A set amount of money is deducted from the employee’s paycheck from each pay period. Not all employees will have access to a 401k plan. In the event that this happens, the employee might opt to set up an IRA (Individual Retirement Account). Nevertheless, picture this scenario: You’ve just accepted a new position at another company. With that comes a lot of change, but you might also be wondering about your 401k plan. Can it be rolled over from a previous job? If so, how can this be done? These questions will be explored and answered in turn below.
After changing jobs, there are several options for your 401k plan. You can cash it out, roll it over into your new job or transfer it into an individual retirement account. With this being said, cashing it out might not be the best option. Doing this can cause you to lose money because of the penalty fines that are required whenever you cash out your 401k too early.
How to Roll Over Your 401k from a Previous Employer
In order to do this successfully, there are a number of steps that you have to follow. There are two different rollover options: indirect or direct. A direct rollover is, oftentimes, much simpler than an indirect rollover. In a direct rollover, the employee has to ask their previous employer to transfer their funds from their old 401k account to their new one. No extra taxes are applied in this process. In an indirect rollover, there is a 60-day time limit. Failing to complete this process in 60 days will result in extra fees. Usually, in an indirect rollover, you have to cash out anything you saved using your previous plan. After this, you have to re-invest this money into your new plan yourself. There is typically a 10 to 20 percent tax involved.
Rolling Your 401k Into an IRA
As mentioned above, an IRA is an individual retirement account. An IRA is different from a 401k plan for many reasons. The 401k plan serves as a benefit from the employer to the employee. The IRA is an account that the employee can open up on their own, allowing them to save money for their retirement gradually over a long period of time. There are four different types of IRA accounts, which include Roth IRAs, traditional IRAs, SEP IRAs and simple IRAs. In order to roll your 401k into an IRA, there is again a lengthy process that you have to follow in order to make sure that it is done correctly. There is also a 60-day limit on this process. First, you need to decide on what type of IRA account you want to open up. Then, you have to actually open up the account. There are several resources online that can assist you with this. After this, you can choose whether to rollover your money directly or indirectly.
Care Financial is a privately owned and operated business providing families, individuals and businesses with retirement planning. Contact us online at www.carefinancialonline.com or call us at 251-250-1745 and see how we can help you.