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3 steps to roll over your 401k to a traditional IRA

Follow this simple rollover process to continue building your retirement savings.

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When you leave your job, your 401k plan balance can come with you. You may be tempted to keep some or all of the money instead of rolling it over, but that may not be the best option. If you cash out your 401k plan balance, you generally pay the income taxes due on the entire amount withdrawn, as well as a 10% penalty tax, unless you are at least 59 1/2 or unless you are retiring from your employer at age 55 or older.

If, however, you want to keep the money in place for retirement, a good strategy to consider is rolling the funds over into an Individual Retirement Account, or IRA.

The process is simple:

  1. Find an IRA investment appropriate for you (such as an annuity, a bank CD, or a mutual fund). You will have to do some research or talk to someone in the financial industries to find out which options are right for you.
  2. Contact the administrator of your former employer's plan and arrange the direct rollover to the custodian of your new IRA. The exact procedure may vary a little from company to company, but don't worry - they've all dealt with this request before.
  3. Sign documents to directly rollover funds to your new account. The funds will then arrive in your IRA for investment as you chose in step 1.

A word of caution: You can receive a distribution of your account balance from the plan instead of arranging for a direct rollover. This might not be the best idea. If you take a distribution, the plan administrator will have to withhold 20% of the distributable amount for federal income taxes. That is a credit toward taxes that may be due when you do your income tax return. When you do this indirect rollover, you can increase the rollover amount, from your own funds, equal to the 20% withholding amount.

Doing a direct rollover, however, avoids this negative consequence. If you roll over the amount of the check you receive without adding that 20% back, then the amount withheld will be treated as a taxable distribution. You will generally have to pay income taxes on that amount as well as a 10% penalty tax if you are younger than 59 1/2.

Neither State Farm nor its agents provide tax or legal advice.

Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it's important that customers understand their options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees, and any potential penalties.

The information in this article was obtained from various sources not associated with State Farm® (including State Farm Mutual Automobile Insurance Company and its subsidiaries and affiliates). While we believe it to be reliable and accurate, we do not warrant the accuracy or reliability of the information. State Farm is not responsible for, and does not endorse or approve, either implicitly or explicitly, the content of any third party sites that might be hyperlinked from this page. The information is not intended to replace manuals, instructions or information provided by a manufacturer or the advice of a qualified professional, or to affect coverage under any applicable insurance policy. These suggestions are not a complete list of every loss control measure. State Farm makes no guarantees of results from use of this information.



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