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Have a 401(k) Plan & Leaving Your Job – There is One Tax-Free Option You Need to Know About

Have a 401(k) Plan & Leaving Your Job – There is One Tax-Free Option You Need to Know About

The most common manner in which IRA accounts are funded is through a rollover from a 401(k) plan from a former employer. Based on the most recent available data, households have transferred $424 billion from employer-sponsored retirement plans to traditional IRAs in 2014. Fifty-nine percent of traditional IRA–owning households in 2016 indicated their traditional IRAs contained rollovers from employer-sponsored retirement plans. Among households with rollovers in their traditional IRAs, 82 percent indicated they had rolled over the entire retirement account balance in their most recent rollover. Households with rollover assets in their IRAs tend to have higher IRA balances compared with IRAs funded purely by individual contributions

In general, in order to rollover funds out of a 401(k) plan to an IRA, a plan participant must have a triggering event. The following are the three common plan triggering events: (i) You are over the age of 591/2, (ii) you leave your job, or (iii) the company terminates the plan. However, in some cases, based off your employer’s 401(k) plan documents, an exception may apply to allow you to access your 401(k) plan funds without a triggering event. In such a case, you may want to go back to the plan custodian and ask if any of your 401k funds are vested and available for rollover. You should check with your plan administrator to see if any other exceptions apply to your plan.

In order for a retirement account holder to complete an IRA rollover, the individual must complete various rollover/transfer documentation and submit the forms to the institution where the rollover funds will ultimately be transferred to. In other words, if the funds are coming from a non IRA account, such as a 401(k) plan, 403(b), 457(b), etc.., the plan participant must initiate the rollover. What that means is that the 401(k) plan participant must go to the 401(k plan administrator and request that the funds be rolled over tax-free to the new IRA custodian. Therefore, it is important to have established your IRA account before initiating the employer plan rollover.

How To complete a rollover?

  1. Direct rollover – If one is getting a distribution from a retirement plan, one can ask the plan administrator to make the payment directly to another retirement plan or to an IRA. The administrator may generally issue the distribution in the form of a check made payable to your new account. No taxes will be withheld from your transfer amount.
  2. Trustee-to-trustee transfer – If one is getting a distribution from an IRA, one can ask the financial institution holding the IRA to make the payment directly from the IRA to another IRA or to a retirement plan. No taxes will be withheld from your transfer amount.
  3. 60-day rollover – If a distribution from an IRA or a retirement plan is paid directly to the retirement account holder individually, the individual can deposit all or a portion of it in an IRA or a retirement plan within 60 days. Taxes will be withheld from a distribution from a retirement plan, so one would have to use other funds to roll over the full amount of the distribution.

IRA transfers and rollovers are always tax-free and can be done without limit so long as the funds go directly from one retirement account to another. This is one of the reasons why they are done so frequently

The Self-Directed IRA Rollover Option

Most retirement plan participants are not aware tat when moving retirement plan funds out of a retirement plan, an option exist to use those funds to make alternative asset investments, such as real estate, hard money loans, private business investments, and even cryptocurrencies. That option is known as a self-directed IRA.

A self-directed IRA is not a term of art and you will not find it anywhere in the Internal Revenue Code. A self-directed IRA simply refers to an IRA account which is permitted to be invested in traditional assets, such as stocks, but also alternative assets, such as real estate or even cryptocurrencies. In the last several years, the number of self-directed IRA accounts has grown significantly.

The best part of using a self-directed IRA is that you get to invest in what you know and understand. In addition, self-directed IRAs are often considered a valuable diversification option and hedge against inflation.

To learn more about how you can fund a self-directed IRA tax-free with 401(k) plan funds, please contact a self-directed IRA specialist at 800-472-0646.

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Posted in IRA Category