When you leave a job, be it through a career change or retirement, you may want to consider a 401(k) rollover to your own IRA, or individual retirement account, rather than leaving your money with an old company you no longer work for. NOTE: An IRA is just a structure. You can purchase an IRA as almost any permissible form, including stocks, bonds, mutual funds, ETFs, annuities, and more.
A traditional rollover, like a typical 401(k) to an IRA, uses taxable funds to fund a taxable account. You can choose to do either an indirect or a direct rollover:
Indirect Rollover: You can take the money out and have a check sent directly to you. Remember you will owe income tax on any amount withdrawn in that tax year unless it’s a Roth 401(k) or TSP, unless you complete a rollover. Your previous employer must by law withhold 20% of your money for the IRS, and you have to account for it on your tax return in the year you withdraw the money. If you are under age 59-1/2, you will also owe a tax penalty. You only have 60 days to put all the money in a new account, so you’ll have to front that extra 20% for your new rollover account until it can be reimbursed to you later, or you will have to pay income taxes on that 20% holdback amount.
Direct Rollover: You can elect to do a “direct rollover,” from institution to institution, dollar for dollar, with no tax impact on you until you begin withdrawing money.
