Smart 401(k) Investing—Moving Your 401(k)

IRAs

 

When you retire or leave your job for any reason, you have the right to roll over your 401(k) assets to an individual retirement account (IRA). You have a number of direct rollover options:

 

Rolling your traditional 401(k) to a traditional IRA. You can roll your traditional 401(k) assets into a new or existing traditional IRA. To initiate the rollover, you complete the forms required by both the IRA provider you choose and your 401(k) plan administrator. The money is moved directly, either electronically or by check. No taxes are due on the assets you move, and any new earnings accumulate tax deferred.

 

Rolling your Roth 401(k) to a Roth IRA. You can roll your Roth 401(k) assets into a new or existing Roth IRA with a custodian of your choice. You complete the forms required by the IRA provider and your 401(k) plan administrator, and the money is moved directly either electronically or by check. No taxes are due when the money is moved and any new earnings accumulate tax deferred. Earnings are eligible for tax-free withdrawal once the IRA has been open at least five years and you are at least 59½.

 

Rolling your traditional 401(k) to a Roth IRA. If your traditional 401(k) plan permits direct rollovers to a Roth IRA, you can roll over assets in your traditional 401(k) to a new or existing Roth IRA. Keep in mind you’ll have to pay taxes on the rollover amount you convert.

 

It’s a good idea to check with your plan administrator and a tax advisor to determine whether a move from a traditional 401(k) to a Roth IRA is allowed and right for you. To authorize the rollover, you complete the forms required by your Roth IRA provider and your 401(k) plan administrator. Earnings that accumulate after the rollover will be eligible for tax-free withdrawal when the IRA into which your assets are moved has been open at least five years and you are at least 59½.

 

Indirect Rollovers. You can roll over assets from your 401(k) to an IRA yourself by requesting a lump-sum distribution from your plan administrator and depositing the check in an IRA. However, you must complete the transaction within 60 days. Any pretax contributions and all earnings that you don’t deposit on time are considered withdrawals and are taxable. You may also be vulnerable to an additional 10% tax penalty if you are younger than 59½.

 

In addition, your employer is required by law to withhold 20 percent of the potentially taxable amount you are moving. Even though that amount isn’t included in the check you receive, you must provide it from another source if you want the full amount of your rollover to remain tax deferred.

 

Investing Your Contributions

 

Once your money is in your IRA, you can invest it in any of the alternatives available through the custodian you have chosen. If you continue to earn income, you may continue to make contributions to your IRA, up to the annual limit set by Congress. You can see the annual caps in the Annual Contribution Limits section. However, you can’t contribute more than you earn in a year, and you can’t contribute to a traditional IRA once you turn 70½ even if you continue to earn income.

 

You must take required minimum withdrawals from your traditional IRA by April 1 of the year following the year you turn 70½ (see Required Withdrawals). Taxes on those withdrawals are due at the same rate you are paying on your other income. In contrast, Roth IRAs are not subject to minimum withdrawal requirements, since taxes have already been paid on contributions and any gains may be withdrawn tax-free.

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