A rollover IRA is a great tool that’s designed to maximize your retirement investing options while offering the same tax advantages you’ll find with traditional employer-operated retirement accounts, such as the 401k or 403b. However, before you can start contributing to an IRA rollover account, you’ll need to understand what they are and how to set one up.
Why Should I Establish a Rollover IRA?
If you’ve recently left a job or are considering a transition to a new employer, you may be wondering what to do with all of the funds you’ve invested in the company’s 401k or 403b retirement plan. You’ve actually got a few different options:
- Leave the money in the employer’s retirement account – Even if you’re no longer an employee of the company, your money can continue to grow undisturbed with the company’s retirement account provider.
- Transfer the money to your new employer’s retirement account – Alternatively, you can transfer your retirement funds directly into your new employer’s accounts without being subject to any taxes or early withdrawal penalties.
- Take the cash distribution – If you need cash right away, you can close out your old retirement account and take the balance of the account as cash. However, be aware that if you choose this option, you may be forced to pay ordinary income tax on the balance, plus an early withdrawal penalty of up to 10% if you’re under age 59 ½.
- Roll your money into an IRA – If you don’t want to keep your funds in company-sponsored retirement account, you can roll old balances into an Individual Retirement Account (IRA).
But which option is right for you? It’s impossible to say for certain, as every person’s financial situation is different, but be aware that there are some major advantages to moving your old retirement account funds to an IRA rollover account. This is because IRAs typically offer a much larger range of investment options than company-sponsored retirement accounts. For example, you may have access to stocks, ETFs, mutual funds and bond funds with better returns than anything that’s currently in your employer’s retirement portfolio.
Rollover IRA Contribution Guidelines
Performing a 401k rollover to IRA is a relatively simple process. You’ll need to choose an account provider (many banks and financial institutions offer these account options), complete the transfer forms provided by your old account provider and submit them – the two account providers will take care of the rest. One last note of caution, though – when completing these forms, be sure to select the option that transfers the money directly from one account to the other. Withdrawing the money from your old account as cash before depositing it into the new account may incur penalties.
Once your new account is set up, you can begin making contributions on your own, either as one-time deposits or through an automatic investing program that withdraws a certain amount of money each month. Currently, IRA contributions are limited to $5,000 if you’re under age 50 and $6,000 if you’re older. These contributions can be made to Traditional or Roth rollover IRA accounts, although you can’t exceed the maximum contribution limits if you’re contributing to more than one account.
Finally, as with your employer-sponsored 401k or 403b, you’ll need to select the investments that your contributions fund. A qualified financial advisor can help you make these decisions if you aren’t comfortable making them on your own, or you can select a target retirement date plan that automatically invests and rebalances your account as you get closer to retirement age.