When leaving a job that has a retirement plan, a rollover individual retirement account (IRA) can be a good option for several reasons. Chief among these are continued tax advantages and more diverse investment choices. Whatever the case, it is important for such rollovers to be handled carefully and with forethought.
The following is about rollover retirement accounts, how they work, and where to establish them.
A Roth or traditional rollover individual retirement account accepts funds from a former 401(k), pension, or other workplace retirement plan. Such an account can permit investors to avoid the taxes and penalties that usually come with 401(k) withdrawals. Note that an IRA rollover generally may only be used once annually.
A rollover IRA essentially allows individuals to shift funds from a 401(k) without losing the benefit of deferring taxes until retirement. While Traditional IRA and Traditional 401(k) accounts provide pre-tax savings, employers make 401(k) investment decisions. IRA investment choices are more flexible since most brokers offer a broad range of options.
Any kind of IRA can be used as a rollover account. An individual may establish a new account or utilize an IRA they already own. A common way to rollover funds is by seeking a direct transfer from the old 401(k) plan. The former 401(k) will pay the funds to the financial institution where the rollover IRA has been opened.
When one leaves their job, either for a new one or to work on their own, they should decide what to do with the money in their employer-sponsored plan. A rollover IRA could be a wise move if goals include lower fees, tax benefits, and increased investment options.
The process is largely straightforward and basically involves:
Factors to consider when rolling over an IRA include:
It is generally advisable to roll a plan over into an account that has an equal tax status. For example, a traditional 401(K) can be rolled into a traditional IRA with no taxes owed. Similarly, funds can be shifted tax-free from a Roth 401(k) into a Roth IRA.
Those leaving an employer largely have three choices. They can:
Investors have options, in terms of starting a rollover IRA. One option calls for adding alternatives to retirement portfolios, a strategy that historically has been fraught with complications and involved high fees.
That is changing. The alternative investment platform Yieldstreet, for example, allows investors to easily diversify their holdings with private-market alternatives. With a Yieldstreet IRA, such assets traverse a variety of classes, including art and real estate.
The overarching goal is to render retirement portfolios less dependent on a stock market that is volatile by nature. After all, diversification does not end with taxable accounts.
Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
Exclusive asset classes were once limited to wealthy investors with high minimum investments. Yieldstreet now offers a range of alternative investments for all, democratizing access to real estate, legal finance, art finance, and more.
To help realize the full potential of one’s retirement portfolio, the best move might be to go beyond stocks and bonds toward private market alternatives. With a Yieldstreet IRA, such returns can grow tax-free or tax-deferred.
All securities involve risk and may result in significant losses. Alternative investments involve specific risks that may be greater than those associated with traditional investments; are not suitable for all clients; and intended for experienced and sophisticated investors who meet specific suitability requirements and are willing to bear the high economic risks of the investment. Investments of this type may engage in speculative investment practices; carry additional risk of loss, including possibility of partial or total loss of invested capital, due to the nature and volatility of the underlying investments; and are generally considered to be illiquid due to restrictive repurchase procedures. These investments may also involve different regulatory and reporting requirements, complex tax structures, and delays in distributing important tax information.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.