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There are many situations in which you might need to do a rollover from your 401k account. Whether you're leaving your job or you want to explore alternative investment options with a self-directed IRA, the rollover is often your first step. This process can be complex, but learning more about it will help to better manage it.
Unfortunately, the IRS restricts how long you have to complete this process, and they will put penalties in place for missing their guidelines. These penalties help the government track when retirement funds are going into a different retirement account versus an early withdrawal. In tracking these transactions, a delayed rollover can be mistaken for a withdrawal, but that doesn't mean you have no recourse. If your rollover takes longer than 60 days, there are things you can do to avoid the IRS' penalties.
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What is a 401k Rollover?
When you contribute to your 401k plan, that money remains tax-free until you begin taking disbursements at retirement age. The government recognizes that there are situations in which a plan participant might want to move their money into a traditional or self-directed IRA. To help those individuals avoid having to pay income taxes and early withdrawal fees on those funds, the IRS grants a 60-day grace period for rolling your funds over into a new IRA. As long as the rollover is complete and the IRS receives your rollover paperwork within that time period, you won't have to pay taxes and penalties.
There are two types of rollovers:
This is the traditional type of rollover that involves requesting a check for the rollover amount from your 401k administrator. Once you receive the check, you have 60 days to deposit the full amount into a new IRA account. If you miss the deadline, the transaction will be viewed as an early withdrawal, and this is where those penalties come into play.
Even if you do meet the deadline, this type of rollover will cost you more than you may realize. Upon issuing the check, the 401k administrator is required to withhold the taxes on those funds. When you deposit the check, you must deposit additional funds to make up for the amount withheld or the IRS will charge you income taxes on the full amount. In essence, an indirect rollover can subject you to double taxes on the rollover amount.
This is a modernized version of the rollover process, and it uses a wire transfer to move the funds from your 401k to your self-directed IRA. Experts and advisors in finance recommend this type of rollover for several different reasons. Primarily, the direct rollover is virtually instantaneous, making your funds available in the IRA account within a day. This saves the time that it would take to receive a check and deposit it in your new retirement account.
Another compelling advantage is that the 60-day rollover requirements become redundant. Since the rollover is instantaneous, you won't have to worry about missing the deadline. The rollover is processed faster and the IRS considers the transaction complete as soon as they receive the paperwork. You can further expedite the process by submitting your paperwork electronically.
In a direct rollover, you never receive the funds. They go directly from one retirement account to another, helping you to avoid the tax loophole that could otherwise cost you a substantial amount. You won't have to worry about paying taxes on the rollover amount, and that leaves you free to roll as much as want over into your self-directed IRA.
Finally, the direct rollover eliminates nearly all of the errors that could occur with an indirect rollover. You won't have to worry about problems with receiving a check via the mail or losing the check before it can be deposited. The wire transfer will result in a verifiable electronic record, so you will still have proof of the transaction. In fact, a direct rollover is more secure and more reliable than the indirect rollover.
What Are the Penalties for Missing the 60-Day Deadline?
The IRS issues harsh financial penalties for an early withdrawal from any 401k or IRA, and it can help to know what those penalties are before starting a rollover. Once you understand the consequences of a missed deadline, it's easier to see why the majority of retirement investors opt for the direct rollover.
As previously mentioned, missing the 60-day deadline will result in having to pay income taxes on the full amount of the withdrawn funds. On top of this amount, you'll also be charged a penalty for an early withdrawal if you're under 59 1/2 years old. That penalty is 10% of the gross amount you took from your retirement account.
You can intentionally take an early withdrawal without facing those penalties if the transaction meets the conditions listed under Rule 72(t) of the tax code. This rule stipulates that you can take an early withdrawal if the account holder has become disabled, or if you want to make a first-time home purchase. Under this rule, you can also use the money to take an early retirement. In the case of an early retirement, you must take equal disbursements for a period of five years or until you reach age 59 1/2.
You can also access your retirement funds penalty-free by taking out a loan. As long as you pay taxes on the borrowed amount and return the full amount within 60 days, you can avoid the 10% penalty fee.
What Can You Do if You Miss the Deadline?
If you choose the indirect rollover option and miss the deadline, there are steps you can take to avoid paying the income taxes and penalties. In the past, the only option that was available was to apply for a hardship waiver from the IRS. However, the fees associated with this process can be almost as costly as the penalties, and it takes quite awhile for the IRS to process and approve the waiver.
A new option is to use a self-certification procedure that the IRS now allows. This involves writing a letter to the IRA administrator where you want to deposit your funds. The letter explains which conditions qualify you for the waiver. The administrator or custodian can legally accept your letter at face value, and treat the letter just as they would treat an official waiver from the IRS.
The qualifying conditions for writing a self-certification letter are:
In addition to meeting at least one of these conditions, you must not have been previously denied a waiver by the IRS. You must also deposit the rollover amount as soon as you are practically able to do so.
Why Should You Do a Rollover to a Self-Directed Gold IRA?
While it may seem as though the IRS complicates a rollover, it's not as complex as it may seem. You'll also find that rolling your 401k funds over into a self-directed gold IRA provides you the opportunity to use your retirement wealth to buy physical gold. The process of investing in gold assets can prove advantageous to meeting your retirement goals in the following ways.
Protect Some of Your Money
As you increase your wealth through investing in stocks, mutual funds, and ETFs, you'll face a greater risk of losing that money through economic downturns. While this doesn't mean you should abandon your investments altogether, it does mean looking for ways to diversify your wealth in effective ways. A self-directed IRA allows you to use your retirement savings to invest in physical assets, such as precious metals. Since gold typically performs in opposition to the stock market, your wealth will be better protected when some of it is used to buy gold bars and coins.
Grow Your Wealth With Reduced Risk
As a physical asset, the value of gold increases alongside inflation. This means your gold will be worth more as the cost of living rises, but it also means a period of sudden inflation will give you greater returns on your gold assets. You can sell your gold during a spike in inflation and hold onto that money until the economy stabilizes. When gold values gradually drop as they do from time to time, you can use your savings to buy more gold. In this way, your gold investments will pay off in a cyclic manner over several years.
Create a Secure Future for Yourself
As a physical asset, gold remains constant over time. Even when the value of gold momentarily drops, you'll still have the same amount of gold that you had when the value was higher. This helps you hold onto your wealth through economic hardships, and your gold's value will increase in the future. As you store more of your savings in gold, you'll be able to protect more of your wealth from market fluctuations. If you do happen to lose the money you invested in stocks and funds, you'll still have the wealth that you used to buy gold. This can prevent you from having to start over after a severe economic crash.
Who Can Help You With Your Rollover?
Initiating a 401k rollover into a self-directed gold IRA is easier when you have professional help. The following gold IRA companies provide that assistance and much more in helping you invest directly in gold and other precious metals.
This gold IRA company stands out for their transparent fees and pricing, and that’s just one reason they consistently earn high ratings from their customers. They will help you with your rollover and provide customer service whenever you might need it. They want to encourage customers to keep active accounts with them, so they strive to provide informative and helpful assistance. They can recommend self-directed IRA custodians and U.S. depositories that are approved by the IRS.
From the very beginning, Goldco wants to help their customers make informed investing choices. When you contact them to show your interest in gold investing, they will send you a free startup kit that has educational materials about precious metals investing. This company will also help you with your rollover, and they provide lifetime customer assistance. They can recommend an IRA custodian and a highly-rated depository if you need help choosing providers of these services.
New or young investors find that this company is a great place to start investing in gold and silver. In addition to their wide range of products that meet the IRS’ guidelines for purity, American Hartford Gold will provide assistance every step of the way. Whether you need rollover help or insights on using gold to meet your wealth-growing goals, they will be happy to help you. They are also known for their generous buyback program.
Communication is important when you want to initiate a rollover without facing IRS penalties. Before you start the process, you should let your 401k administrator know about your intentions. Additionally, take advantage of the help offered by your gold IRA company. Their help can enable you to process the rollover more efficiently, and you'll never have to deal with financial penalties. You'll also be able to start investing your rollover funds sooner, so you won't lose precious time in growing your retirement wealth.