What’s the best way to rollover 401k funds? There are only a few things that you can do without incurring unwanted taxes.
Here’s a look at your options.
Although the terms are sometimes used interchangeably, rollovers and transfers are actually different legal terms. When account holders take rollovers, any investments within the account are liquidated and a check is made payable to them. The funds must be deposited into an IRS-approved account within 60 days.
Otherwise, the funds will be subject to income tax.
Transfers are generally initiated by the new financial institution. The account holder contacts the new financial institution. Forms are sent to the existing institution and the funds are transferred directly into the new account.
There are no limits on the number of transfers that a person can make during a 12 month period, although the financial institution may charge an early withdrawal or other fee. Only one rollover may be taken during a 12 month period, without incurring taxes.
So, actually, the best way to rollover 401k funds, when it comes to avoiding unnecessary taxes, is to “not” take one. A transfer is a better way of moving the fund. Most account holders choose transfers, which is why many institutions have come to refer to them as rollovers.
Contributions to traditional IRAs and 401Ks are typically made with pre-tax dollars, reducing the amount of taxable income that a person has during the tax year. Contributions to a Roth account are taxed as regular income.
Withdrawals from traditional IRAs and 401ks are taxed as regular income. Withdrawals from a Roth are not taxed, assuming they are made after a person reaches retirement age.
Many people believe that the best way to rollover 401k funds is to deposit the money into a Roth. That way, they avoid future taxes. But, there are currently limits to the amount that can be transferred. And, the account holder would pay taxes on the amount that is transferred.
Basically, you must decide if you would prefer to pay the taxes now or pay them in the future.
With a self-directed account, you would be able to invest in precious metals, real estate or other property. Most 401-k and IRA providers have limited their account holders to stocks, bonds, bank CDs and similar investments.
In my opinion, which is shared by many, the best way to rollover 401k funds is to find a provider that offers truly self-directed accounts and transfer the funds to that account. You can choose either another 401K, a Roth or a traditional IRA.
The recent fluctuations in the stock market have proven that those kinds of investments are not without risk. Even when you take your providers advice concerning the safest choices, you risk a great loss.
For many years, we have known that the returns from government bonds and bank CDs are not enough to keep up with the inflation rate. But, returns from real estate are historically higher than those found in the stock market.
So, ultimately, the best way to rollover 401k funds is to choose a self-directed account and invest it in real estate. You’ll get higher returns and your risk is lower.