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401(k) Tip |
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Rolling over your 401(k) plan keeps your assets tax deferred. A rollover IRA gives you flexibility, a range of investment choices, and control over managing your withdrawals. |
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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). If you have a traditional 401(k), you can roll over to a traditional 401(k), and if you have a Roth 401(k), you can roll over to a Roth IRA. You may also qualify to convert your traditional rollover IRA to a Roth IRA.
If you’re planning to roll over your 401(k), you can open a new IRA with a custodian of your choice or you can roll the assets into an existing IRA. To move the money, you give the account information to your 401(k) plan administrator, who can send the assets directly to your IRA custodian either electronically or by check. This process is known as a direct rollover. No taxes are due when the money is moved and any new earnings accumulate tax deferred.
You can also do an indirect rollover by taking a lump-sum withdrawal from your 401(k) and depositing the money in an IRA within 60 days. However, your employer is required by law to withhold 20 percent of the total you want to move to pay the taxes that will be due if you fail to complete the rollover. To keep the entire amount tax deferred, you must use money from another source to replace the 20 percent that has been withheld. If you do, the money that was withheld will be returned to you when you file your tax return for the year. But if you deposit only the 80 percent you receive, the 20 percent is considered an early withdrawal and the tax and potentially a 10 percent penalty will be due.
Once the 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. In 2009, the government caps contributions at $5,000 plus an additional $1,000 if you’re 50 or older. However, you can’t contribute more than you earn in the year, and you can’t contribute to a traditional IRA once you turn 70 ½ even if you continue to earn income.
You must take required minimum withdrawals from a traditional IRA by April 1 of the year following the year you turn 70 ½. Taxes on those withdrawals are due at the same rate you are paying on your other income. In contrast, Roth IRAs don’t require withdrawals.
You may also be able to roll an IRA into a new employer’s retirement savings plan, though not all plans accept rollovers. It’s wise to consult a tax professional if you’re considering such a move to ensure you manage it correctly.
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