Rollovers
Moving retirement money- 401k to IRA rollovers and other alternatives
Leaving a job because of voluntary or involuntary termination or retirement often raises an important question. Do I leave my money in my employer’s 401k plan or do I move it elsewhere? Some plans allow employees to keep their funds in the plan if the amount meets a certain minimum amount. Amounts under the minimum amount can be rolled by the plan administrator to an IRA plan of their choosing.
Participants in 401k plans who contributed before-tax contributions can roll their funds tax-tree into a traditional IRA. Funds can be rolled into an existing IRA or a special rollover IRA can be created for this purpose. The rollover IRA makes it easier to roll funds back into another employer’s 401k plan without mixing rollover and deductible contribution funds. Keeping the rollover funds segregated in their own IRA is the idea.
Rollovers can be made directly to other 401k plans also if the new plan permits it. Plan participants should check with their new plans administrators or plan sponsor (employer) for specific information.
Roth to Roth rollovers
Contributions to Roth 401k’s have only been an option since January of 2006. There are not a lot of participants taking advantage of this new retirement saving tool yet. For those who already carry a balance in a Roth 401k, a rollover to a Roth IRA is a possibility when you leave the plan.
A direct rollover from a Roth 401k to a Roth IRA is the easiest and cleanest method. A direct rollover is when the rollover check is made out to the new plan administrator and not the IRA owner. (that’s you)
The check is then mailed to the new administrator, or in some cases to the owner, and then the uncashed check is turned over to the new administrator. This direct method raises few questions about the legitimacy of the rollover.
The ‘in-direct- rollover
An alternative method, and one that may be fraught with problems, is often referred to as a 60-day rollover. With a 60-day rollover, the plan administrator makes the check out as a distribution to the plan participant. The plan administrator will withhold 20% for taxes. The participant has to deposit the entire amount of the distribution, including the tax withholding amount into an IRA or another qualified retirement plan. The deposit has to occur within 60 days of when the original check was sent.
When rolling a Roth, the participant restarts the clock on the 5-taxable-year requirement for tax-free withdrawals. Generally, a Roth owner can begin withdrawing funds tax-free after 5 years and attaining age 59 ½.
