How To Rollover A 401k To A Traditional IRA
To help facilitate the portability and transferability of 401k accounts (as well as other pension types) individuals may now do a 401k rollover to traditional IRA accounts. This 401k rollover is designed to help individuals leaving their current job who need greater flexibility and control over their retirement accounts upon the transfer.
While you may still rollover your 401k account into another 401k account, many find that the ability to rollover into a traditional individual retirement arrangement allows them flexibility, options, and control that the 401k cannot provide.
One significant motivation for many individuals for transferring their accounts into a traditional IRA versus leaving them with another 401k plan is that there are more options for the beneficiary. If the account hold were to die while the pensions funds were still in the 401k, the beneficiary would be limited by and subject to whatever distribution options the plan provides. The distribution options are often limited and detrimental to the health of the funds. Often 401k accounts require a lump sum distribution upon the account holder's death, or some other tax inconvenient option.
The 401k rollover to traditional IRA often provides the beneficiary the ability to continue distributions throughout the life expectancy of the beneficiary. Rather than take a lump sum distribution, the account is allowed continued growth. The reason that pension plans do not often offer this type of distribution option is that this type of account management is expensive for the company holding the account. The sooner they do not have to manage the funds the less expensive it is for the company.
How Do I Do A 401k Rollover to IRA?
Today most employer-sponsored retirement plans allow the option to rollover to a traditional IRA account. This is becoming less and less exclusive to traditional IRAs, as of 2008, you can now do a 401k rollover to Roth IRA (see topic in information center).
With most distributions from your retirement plan, you are able to rollover your 401k to either an existing IRA account or a new account. There are certain restrictions however that may prevent you from completing the rollover.
First, your funds must not be from a series of periodic payments that occur over the life expectancy of the participant or those that occur for over a period of ten years or more. The funds also may not come from a hardship withdrawal from your 401k plan.
The easiest way to accomplish the rollover is to do what is called a direct rollover. This allows the plan participant to directly rollover the funds into a traditional IRA. Electing a 401k direct rollover is now quite simple, as a new law requires qualified plans to allow direct rollovers to IRAs. Also by doing a direct rollover, the participant is able to avoid the 20 percent income tax withholding requirement on a distribution paid directly to the participant.