When it comes to retirement, there are a number of different investing options to choose from. Even the most financially literate individuals can get lost in the weeds when trying to set up retirement accounts that are likely to be long lived and effective. Some of the most familiar sounding terms, like an IRA account or a 401(k), might seem natural to include in a portfolio, but not all retirement plans encompass them. What’s more, few individuals take the time to understand the nuances of these accounts including rollovers, fees, and income tax implications.
An individual retirement account, or IRA, is a popular tax-advantaged option that many people choose as a part of their financial planning strategy. Traditional IRAs, Roth IRAs, SIMPLE IRAs, SEP IRAs, and 401(k)s are all options available to investors depending on individual financial goals. Investors may decide moving or rolling over an IRA or 401(k) into another IRA or self-directed IRA. This could be as a strategy to diversify an investment or for reasons such as higher returns, lower fees, or different investment options.
It's important to understand that the IRS regulates how often funds can be moved from one IRA to another without paying taxes and penalties. To avoid finding yourself in a distribution disaster, we'll help break down the timeframe of rolling over your 401(k) or IRA by answering the top 5 most frequently asked questions.
What Is a Rollover IRA?
A rollover IRA is a term used for when a retirement account is moved, where the account holder moves the retirement savings and/or assets from the existing account to an eligible IRA at a different custodian. Moving the account can be done two different ways: via direct rollover or indirect rollover.
With a direct rollover, the account is directly moved from one custodian or financial institution to another. For an indirect rollover, the account holder receives a check from their retirement plan to be deposited into an IRA within a 60-day window.
The process of rolling over an IRA should not be confused with an IRA transfer. With an IRA transfer, an IRA custodian can directly transfer funds an unlimited number of times straight to a new, eligible retirement account on the customer’s behalf. Investors are not penalized on this transfer as it is considered a trustee-to-trustee transaction and the funds never pass through the IRA owner.
Why Should I Roll Over an IRA or 401(k)?
401(k)s in particular are unique investment options because they are employer driven. That means when an individual leaves a company, they need to decide what to do with their 401(k) funds. There’s no longer the option for the investor to contribute to the 401(k) funds themselves, but they can continue to grow their investment in different account types via rollover.
In some cases, investors are able to transfer their funds into the next 401(k) available with a new employer, assuming one with those allowable terms is offered. Another viable option for repurposed 401(k) funds is to roll them over into an IRA. This can often be the best option because the money contained in the account gets to remain tax deferred while investors continue to grow their retirement savings. What’s more, IRAs are among the most flexible options when it comes to choosing the investment choices that are available. IRAs can encompass mutual funds as well as anything from stocks and bonds to real estate (depending on the type of IRA).
Of course, there is always the option of withdrawing the 401(k) funds prematurely, but this exposes investors to a bevy of taxes and penalties, especially if they do not meet certain age requirements or qualified expenses criteria.
How Often Can I Roll Over My IRA?
Investors often ask how many times you can roll over an IRA. For this, the magic number to keep in mind is one. IRA rollovers can be completed once in a 12-month rolling period, not a calendar year, regardless of the IRA account type. Even if you hold multiple retirement accounts, you are only eligible to make one rollover per the 12-month regulation period set by the IRS. Violating these terms can result in a taxable distribution and a 10 percent penalty if the individual is under the age of 59 ½.
When it comes to where to rollover an IRA, investors have several options. Many investors choose to roll over a Roth IRA or other account into another low-risk investment and savings option such as a self-directed IRA. This process varies depending on the investment type and comes with a variety of tax implications depending on whether money is changing from pre-tax to post-tax standing.
How Often Can I Roll Over My 401(k) to an IRA?
It can be a smart financial move to roll over an old 401(k) with a former employer into a self-directed IRA. Investors often do this to diversify and monitor their investments and retirement savings. This also allows retirement plans and assets to remain tax deferred without taxes and penalties during the transfer.
While the IRS doesn’t impose penalties on rollovers made from a traditional 401(k) or Roth 401(k) to another eligible retirement account, the rollover must be done from one custodian to another to avoid the 60-day rollover rule.
401(k) rollovers into an IRA can be done directly or indirectly. Keep in mind that indirect rollovers remain a far riskier option because of the deadlines and responsibility imposed on the investor in order to complete the transaction themselves. The account holder is granted a 60-day window to deposit their funds into an eligible retirement account. If they do not meet this timeframe, the funds received are counted as taxable income. You will also have early withdrawal penalties if you are under the age of 59.5
Investors should consult with a tax advisor to find out if there are any forms needed to file. An IRA provider will usually issue a 1099-R when making a rollover to an IRA.
Can I Contribute to a Rollover IRA Once It’s Established?
Yes. However, it is important to be well-versed in the contribution limits and tax implications of a specific account type.
How Can IRAR Help?
Transferring funds from one tax-advantaged account to another can be a tricky process. For almost 30 years, IRAR has provided investors of all levels with resources and services to support their retirement financial goals.
When you rollover your 401(k) to an IRAR self-directed account, you choose your own assets. Assets allowed are not limited to mutual funds and publicly traded stock. A self-directed IRA allows investments in alternative assets such as private company stock, real estate, and other non-traditional assets.
As part of our custodial services, our mission has been to empower everyday people to take control of their retirement options at a lower cost. At IRAR you save over 50% on account fees.
Book a free consultation to speak with one of our self-directed IRA experts to find out more about the process of rolling over a self-directed IRA.