WHAT IS A ROLLOVER IRA?
Many of the residents of our senior living center in Denver, Colorado have many decisions to make before they move into their new homes. Many of the decisions involve financial issues that revolve around how to handle money during the retirement years. One of the most important financial issues stems from how to handle the money that has accrued in a retirement plan, such as a 401k sponsored by an employer. To get the most out of your money while living at our assisted living facility, you should understand the answer to the question, what is a rollover IRA?
A rollover Individual Retirement Account (IRA) represents a financial account that allows you to transfer financial assets from an employer-sponsored retirement plan into a traditional IRA. The primary reason to rollover a 401k is to maintain the tax benefits provided by traditional retirement accounts. A retirement account such as a 401k grants you the right to defer taxes until you reach a certain age. Rollover IRAs do not limit how much money you can switch from a traditional retirement account like an employer-sponsored 401k. You also can invest in a wide variety of financial assets, including stocks, bonds, and mutual funds.
What Options Do I Have for a 401k?
If you plan to retire, you typically have three options for handing the money that has accrued in a 401k. First, if your ex-employer permits it, you can leave the money where it has accrued in a 401k. However, this option leaves you on your own, as the HR department no longer is available to answer questions. You also might be charged much higher account processing fees. Second, you can cash out your retirement savings, but you become subjected to incredibly high taxes levied by the IRS, as well as onerous penalty fees for cashing out your retirement plan early. Third, by far the most appealing option is to roll over your 401k into a traditional IRA.
How to Transfer Money Accrued in a 401k Retirement Plan
The first step in opening a rollover IRA is to choose the type of IRA you want to open. Traditional and Roth IRAs represent the most popular rollover options. The main difference between the two IRAs is how the IRS taxes each retirement plan. With a traditional IRA, you can claim a tax deduction on any contributions made throughout a tax year. On the other hand, you must pay taxes on any withdrawals made from a traditional IRS during your retirement years. With a Roth IRA, you cannot claim any tax deductions, but all withdrawals after you turn 59 1/2 years old remain tax-free.
Next, you must select a provider for the rollover IRA. Although choosing a provider for a rollover IRA is not the biggest factor that determines the growth of your investment portfolio, it is an important decision because of the fees and how easy it is to access the most profitable investments. The two most popular types of providers for opening a rollover IRA are an online broker and a robo advisor. After you select a provider, the time has come to transfer your money to a rollover IRA. Contact your former employer’s plan administrator, complete a few forms, and then follow the instructions of the manager of the rollover IRA to begin your new financial journey during retirement. As one of the highest-rated retirement communities in Denver, MorningStar at Observatory Park offers assisted living and memory care services. Learn more by scheduling a tour of our assisted living facility in Denver, CO.