Tips for opening a new IRA for a 401(k) rollover

Let’s start with the basics

What’s an IRA anyway?

An IRA is short for “individual retirement account”. It’s a type of account that you can open on your own, and doesn’t depend on your employer. It’s also an account where you can transfer any savings in your 401(k), or other employer-sponsored account, that you accumulated at a prior job. Think of it as a big pot that you pour your 401(k) gold into over time.

IRAs allow you to:

• Defer taxes owed on your contributions until you withdraw at retirement
• Invest your savings in a much broader range of investment options, helping them grow over time (401(k)s only give you a few options)
• Continue contributing up to $6,000 per year (depending on your income)
• Control the fees you pay (IRAs typically have lower fees than employer-sponsored plans)
• Choose a provider that best fits your needs (employers can move plans to another provider at any time without your consent)

Transferring 401(k)s, or other employer-sponsored retirement accounts, into an IRA is a special type of transfer called a “rollover”. Rollovers are generally tax-free and don’t count against your annual contribution limits. This makes IRAs great for consolidating and keeping track of all your retirement savings as you change jobs over time.

What’s the difference between Roth, Traditional, and Rollover IRAs?

The difference has to do with when you pay taxes on your contributions:

• A Roth IRA is for after-tax dollars and allows you to make tax-free withdrawals when you retire (after age 59 1/2).
• A Traditional IRA is for pre-tax or tax-deducted dollars and allows you to pay taxes later when you withdraw (usually when you retire after age 59 1/2).
• A Rollover IRA is a special type of Traditional IRA for rollovers. Rollover funds in this type of IRA can sometimes be rolled back into an employer-sponsored 401(k), if the plan allows for it. You can still contribute to Rollover IRAs the same way you would to a Traditional IRA.

Ok, so should I open a Roth, Traditional or Rollover IRA for my rollover?

It all depends on what type of funds are in your 401(k) and if you want to pay taxes as part of your rollover. Here’s the rundown:

If you still aren’t sure and decide to do your rollover with Capitalize, don’t sweat it! Our rollover experts will review everything before processing your rollover and confirm all the details to make sure your rollover goes smoothly. If anything looks off, we’ll help you correct it before initiating the transfer.

Does rolling over into an IRA count against my contribution limits?

Nope! Rollovers are a special type of transfer that don’t count against IRA contribution limits.

Can I transfer my old 401(k) into my current 401(k) instead?

If you are currently enrolled in a 401(k) plan then that plan provider might allow you to transfer in old 401(k) plans. It generally takes longer to do than a rollover into an IRA and you’ll be subject to the fees and investment choices negotiated by your employer. This is still a good option for consolidating your retirement account, even though most people who roll over choose an IRA. Learn more

Does it cost anything to roll my old 401(k) into an IRA?

Generally, no! Rollovers are tax-free, unless you are converting pre-tax, or Traditional, contributions into after-tax, or Roth, assets. There is also no penalty for rolling 401(k) funds into an IRA. Some 401(k) providers may charge a one time fee (around $50 on average) to transfer the funds, but usually take it directly out of your balance as part of the transfer.

Don’t worry — if we’re handling your rollover and any of this applies to you, we’ll make sure you know before you proceed so there are no surprises.

Can I just cash out my 401(k)?

Taking an early distribution from your 401(k) is an option, especially if you need money quickly in an emergency. Keep in mind that you’ll likely pay taxes and penalties on your withdrawal, and this decision may negatively impact your financial readiness for retirement.

What if I don’t have much money in my 401(k)?

No matter how much you have in your account, all withdrawals are subject to taxes and penalties if you are under 59 1/2. If you have a lower balance account, some plans allow providers to move the money or cash out without your consent.

• If your balance is under $5,000 when you change jobs, your provider may automatically transfer your funds into what’s called a Safe Harbor IRA that’s selected by your employer (they should contact you before doing this). Safe Harbor IRAs are an automatic rollover IRA program developed exclusively for missing or non-responsive terminated plan participants. Funds moved into these accounts may or may not be invested and typically have much higher fees that can eat away at your savings.
• If your balance is under $1,000 when you change jobs, your provider may automatically cash out the account and mail you a check. If this happens, you’ll still be responsible for any taxes or penalties for a withdrawal on the amount.

It’s a good idea to keep tabs on your retirement savings, no matter how small. Rolling your funds into an IRA can help ensure that your savings continue to grow and won’t incur any unforeseen taxes or penalties.