Besides your salary, you contributed to a 401(k) retirement plan, amassing quite a nest egg. You could leave your funds with this employer, but why would you? After all, you have many years of work ahead of you and keeping track of a plan controlled by a former employer can be a hassle. Instead, transfer your funds to an Individual Retirement Account (IRA) for improved control and tax savings. Read on and we will look at the steps you should take.
1. Determine rollover eligibility.
Before you move your retirement account to an IRA, you must determine if the account is eligible to be moved. If it is a traditional 401(k) or “qualified” plan, then you can.
You may also move funds from a government 403(b) or 457 plan. Also eligible are a simple employee pension or SEP and a savings incentive match plan for employees also known as a “Simple” plan. Consult with a tax advisor for guidance.
2. Select your IRA.
You have a choice of places to set up your IRA. You can go with your bank or a different commercial bank when opening up your account.
Other options is to open an IRA with a different type of financial institution, such as a credit union. Also, a brokerage firm, mutual fund, a life insurance company or a stockbroker can handle your IRA.
3. Identify your investment opportunities.
When you open an IRA, you must select the plan that is right for you. Your funds can be invested in mutual funds, stocks, cash and other investment vehicles. Understand where that money is going and what risks are involved with each investment.
You should also know that some IRAs require a fee to open the account or fees for managing the account. Review the prospectus to understand the requirements. Seek recommendations from former coworkers, friends and your tax advisor when shopping for an IRA.
4. Begin the rollover process.
Rolling over money from your retirement plan to an IRA is a fairly straightforward process. You may be able to handle everything online or over the phone.
Notify the plan administrator of your current retirement account that you plan to transfer funds. You have a choice here: a direct transfer sends money from the retirement account directly to your IRA. An indirect transfer sends that money to you to deposit yourself. You then have 60 days to make the rollover or those funds will be taxed — plan to make your indirect transfer a speedy rollover to avoid taxation.
Work with the new administrator to ensure that your wishes are carried out. You will need to provide your name, address, your Social Security Number and other personal information when opening a new account.
5. Complete the rollover process.
The related forms for rolling over your retirement account can usually be completed online. Or, you can choose to print these out and mail them in. Contact the administrator to discuss your options and to choose the method that works best for you.
As always, work with your tax advisor or other financial planning professional to discuss your options. If you are close to retirement age, he or she may recommend that you leave your funds in place.
When the retirement transfer has been completed, begin to track your new investment. Work with your financial advisor to make changes as necessary.
See Also — Roth IRA: Retirement Planning Essentials
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