401(k) To IRA Rollovers

The Government has structured 401(k) plans as critical tools to help employees build retirement funds. Savers, of course, must familiarize themselves in regards to the strengths and weaknesses of 401(k) plan and Individual Retirement Accounts (IRAs), prior to committing to important rollover decisions. Americans must follow particular steps and guidelines pertaining to both plans, in order to avoid major tax liabilities that may be triggered by the rollover process.

The 401(k) to IRA Rollover

Section 401(k) of the Internal Revenue Code stipulates that employees are not taxed for deferred compensation. 401(k) account contributions and investments therefore grow upon a taxed deferred basis, but will be taxed at ordinary income tax rates upon withdrawal. Be advised that the Internal Revenue Service (IRS) generally penalizes 401(k) withdrawals made before the age of 59 ½. IRS Form 1040 includes a line for filers to pay the ten percent “additional tax on qualified retirement plans.”

Savers do have options upon either changing jobs, or retiring from their respective careers. The 401(k) into Traditional IRA rollover may be considered to help investors avoiding penalties while also deferring income taxes for a later date.

IRA Investment Decisions

The financial industry has engineered a near limitless selection of IRA investment options to serve consumer needs. Banks, mutual fund companies, brokerages, and insurance companies do offer IRAs. Large corporations also have set up direct reinvestment plans (DRIPs) that enable savers to purchase stock directly from the company and fund IRA accounts.

Sophisticated investors who prefer total control for trading securities would be served best to open up an IRA with a discount brokerage. Savers that do not have the time or energy to research investments should hire a competent advisor to provide recommendations for the transition.

Traditional IRA Framework

Traditional IRA and 401(k) plans do feature similar guidelines. IRA money grows upon a tax-deferred basis, until withdrawal. IRA withdrawals are then taxed at ordinary income, after participants reach the age of 59 ½. Early withdrawals will be penalized with the same ten percent “additional tax,” which is levied upon 401(k) plans by the IRS.

Still, savers cannot enjoy tax-deferred growth within the IRA account forever. Tax law states that required minimum withdrawals are to occur at the age of 70 ½. IRS officials and financial advisers may perform special calculations to help savers determine the amount that must be withdrawn and taxed at that point in time.

IRAs also carry annual contribution limits that are less than the 401(k) account. Congress and the IRS adjust and announce these limits every year.

Financial Risks

Savers should avoid cashing out old 401(k) themselves before rollovers, because holding the check in your own possession for an extended period of time may trigger severe tax penalties. Again, savers are responsible for withdrawing a certain amount of money from the IRA after reaching the age of 70 ½. Failure to do so leads to additional taxes and penalties.

Self-directed IRA accounts carry additional investment risks because of choice. Amateur investors may be overwhelmed by IRA account selections that include individual stocks, corporate bonds, money market securities, and mutual funds. Savers may be best served to hire Onyx Investments to lower the risks of losing significant portions of retirement assets and savings.