Step 2: Decide how to handle your 401(k) rollover
There are several options when it comes to moving funds in an old 401(k) plan.
You can choose to:
- Leave the plan with your old employer
- Roll the money into your new company’s 401(k) plan
- Remove the cash and face early withdrawal penalties
- Roll over funds into an IRA
There are pros and cons to each choice. Yet most people who move their 401(k) assets transfer their 401(k) funds into an Individual Retirement Account, or IRA.
Step 3: Open an IRA to receive 401(k) money
Already have an IRA? Great — skip this step
There are a few options you have with an old 401(k), but most people who move their 401(k) assets transfer their 401(k) funds into an Individual Retirement Account, or IRA.
When choosing an IRA, you’ll want to decide whether you prefer to pick your investments yourself, or have them managed for you. Some IRA providers focus on managing your assets for you, while others let you open an account and pick investments yourself.
Once you’ve decided on a provider, you’ll want to open an IRA that matches the ‘tax-type’ as your 401(k) in order to avoid paying any unnecessary taxes:
- If you have a Traditional 401(k), your contributions came out of your paycheck with no taxes paid. That means you’ll need to move that money into a Traditional or Rollover IRA to avoid unnecessary taxation.
- If you have a Roth 401(k), your contributions were post-tax, so you’ll want to transfer them into an equally tax-favored Roth IRA.
Need help choosing an IRA? Capitalize can help you compare providers so you pick an IRA that suits your needs as part of our 401(k) rollover service.