Most people these days are concerned about retirement. Preparing for the future means crafting a careful savings plan, but life issues can derail the efforts and leave people ill-prepared. Using all available opportunities to help you achieve your goals is important. A 401(k) rollover is an excellent way to help increase your retirement savings, but it is essential to know what to consider before you make any financial moves.
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Understanding 401(k) Rollovers
A 401(k) rollover allows you to move your current 401(k) to a new retirement account that may expand your investment options. The account holder maintains the tax-deferred status, allowing them to grow their retirement savings and take greater control over their futures. With a 401k rollover, you can invest in an IRA.
There are two types of rollovers:
- Direct rollovers allow funds to transfer to the new account directly.
- Indirect rollovers send the funds to the account holder, who deposits them into the new account.
Indirect rollovers are riskier because the account holder only has 60 days to deposit the funds into the new account or face penalties. Failure to deposit the funds within the time frame could result in you owing taxes.
What are the Benefits of 401(k) Rollovers?
Understanding the advantages of 401(k) rollovers can help you make wise financial moves. Take the time to learn about the options and advantages, including the following:
Increased Flexibility
One of the top advantages of rolling over into an individual retirement account is the increased investment options. Traditional 401(k) accounts are typically limited to a few mutual funds, so those wanting to diversify their investment portfolios will find few options with this account.
Rolling over to an IRA allows investors to invest in stocks, bonds, precious metals, ETFs, and other assets. Those nearing retirement age will especially find the increased flexibility helpful.
Reduced Fees and Expenses
Investors can also reduce fees by rolling over to an IRA. Most 401ks have multiple fees, including administrative and management. Rolling over and reducing these fees means investors can save more money for retirement.
Account Consolidation
Those who have worked for multiple employers over the years may have several 401k accounts. A rollover can help consolidate these into one IRA account, making management more accessible. Managing numerous retirement accounts can become overwhelming and stressful. Investors will find consolidation helps keep track of the required minimum distributions until they reach age 73. Consolidation puts all your investments within easy reach for less stress.
Tax Penalty Reduction
Yet another benefit of rolling over to an IRA is the potential for reduced tax penalties. Funds move seamlessly from one account to another without triggering any tax penalties. To avoid tax penalties, choose a direct rollover or adhere to the 60-day deposit rule with an indirect rollover.
401k Accounts Boost Your Retirement
Although having a 401k is a sound way to prepare for retirement, it may not be the best for all investors. A rollover offers attractive advantages to investors, especially those nearing retirement age. With the increased flexibility, reduced fees, and easier management, it is no surprise many people are making the switch. It is essential to conduct the rollover properly to avoid unwanted tax penalties and other issues. With the right guidance, rolling over to an individual retirement account will be straightforward.
