The best way to transfer money from a 401(k) to a rollover IRA is asking the former employer to do a trustee-to-trustee transfer, according to U.S. News. Withholding tax will be imposed if the employer issues a check.
Individuals can't keep employer contributions to their 401(k) plans until they are fully vested in their plans. If they leave their employer before being fully vested, they may forfeit some or all of the employer match, U.S. News explains. A trustee-to-trustee transfer lets individuals transfer the money without taxes being withheld on the rollover. If an individual chooses to rollover with a check, the transfer is subject to taxes. However, if that rollover is made within 60-days, the tax withheld by the former employer is returned to the individual at tax time, states Investopedia.
People can choose from two different types of IRAs. The biggest benefit of a traditional IRA is that the investment is tax deductible, as pre-tax money is placed in the IRA, and that contribution is not part of taxable income, Investopedia reports. The biggest disadvantage is that taxes are paid when a withdrawal is made.
A Roth IRA contribution is made with post-tax income. The biggest advantage to a Roth IRA is that when money is withdrawn, no taxes are paid, because they were paid during the contribution, Investopedia explains.