When it comes to retirement planning, it's important to understand the difference between an IRA rollover and a 401(k) rollover. A direct 401(k) reinvestment allows you to defer taxes until you withdraw the money and avoid tax penalties. This can include bonds, mutual funds, stocks, index funds, and exchange-traded funds or other types of funds. Transferring your money to an IRA can reduce the administrative and management fees you've been paying, which can affect the return on your investment over time. A 401(k) rollover occurs when you withdraw money from your 401(k) plan and transfer those funds to another tax-advantaged retirement account.
Many people choose to deposit their 401(k) into an individual retirement account (IRA). However, you may also be able to transfer your balance to another 401(k) plan. An IRA allows participants to access withdrawals without penalty for certain expenses, such as medical expenses, college fees, and the purchase of a first home. When withdrawing funds from a 401(k), you'll have to pay large tax bills and penalties for the amount of the withdrawal. The IRS requires 401(k) plan administrators to withhold 20% of the total distribution for federal taxes, and a 10% early withdrawal penalty applies.
When withdrawing funds from an IRA, you can choose to defer paying taxes or decide the actual amount of taxes to be withheld based on the tax collected. An asset transfer occurs when you tell your retirement account provider to transfer funds directly between two accounts of the same type, for example, from a traditional IRA to another traditional IRA. Most of the time, a new IRA has more benefits in terms of fees, investment options, and tax savings than a 401(k). However, it's important to weigh the pros and cons of transferring your 401(k) to an IRA before making any changes. Be sure to write your Schwab Rollover IRA account number on the check and deposit it within 60 days to avoid taxes and penalties. Many people benefit from converting a 401(k) into an accumulated IRA after leaving their job.
This often comes in the form of lower fees, a greater choice of investments, or both. Therefore, you can contribute additional money to your accumulated IRA the year you open it up to the allowable contribution limit.