When you retire from a job, the money in your employee-contributed 401K can go away, unless you transfer it into another retirement account like an IRA. Transferring retirement accounts actually has some benefits, like lower fees and a larger selection of investment options. That being said, there are some tax implications that can occur when you transfer accounts. Before you get going, it’s important to be informed of your options and know what to expect in order to secure your retirement funds or avoid a financial hit.

Benefits of IRAs

IRAs provide more information and options about where to put your money, whereas 401Ks have pretty limited investment options. This is beneficial  because with assistance of an IRA you can avoid high investment fees while still investing in a variety of places. IRAs also let you withdraw early from a retirement account. Typically, you shouldn’t do this, but if the need arises, IRAs provide more flexibility.  

Indirect vs. Direct 401K Rollover

Direct Rollover

With a direct rollover, your former retirement plan assets are directly transferred from your 401K plan to a traditional IRA. The electronic transfer is typically easy and seamless, and there are no tax requirements during this part of the process.

On the other hand, transferring retirement assets from a 401K to a Roth IRA is a bit more complicated because there are taxes involved. Roth IRAs are funded with after-tax dollars, whereas 401Ks and traditional IRAs are funded with pre-tax dollars. With traditional IRAs, your  retirement withdrawals are taxed like normal income. Roth IRAs offer the benefit of tax-free withdrawals during retirement, so if you decide to transfer your assets from a 401K into a Roth IRA, you’ll have to pay taxes on that amount.


Indirect Rollover

With direct rollovers, your money gets transferred from one account to another. With an indirect rollover, you receive a check from your 401K with 20 percent of it withheld for tax purposes. You have 60 days to deposit money into another retirement account. While direct rollovers are easy and simple, indirect rollovers can serve as a short-term loan if and when you need it. If you have just ended your job and are looking for another one, you can use the money from the indirect rollover to hold you over until you find employment. As long as you redeposit it into another retirement account within 60 days, you won’t get penalized. After those 60 days are up and you haven’t deposited, you will have to pay a 10 percent penalty, and will also have to report the amount withheld on your tax form as both income and taxes paid. Then, it is up to you whether you deposit the money into another retirement account or make up for that money from other funds. It is not in your best interest to hold the money in the account for more than 60 days because you’ll have then depleted your 401K. You worked hard to contribute to that account and your retirement funds should be a priority.


Contact us at Mercurio Wealth Advisors for more information and assistance with your retirement plans. We are dedicated to helping you retire with as little stress as possible.