Rolling Over A 401(k) Or 403(b) To An Ira
Should I rollover my 401(k) or 403(b) into an IRA
?
If you wonder what to do with the 401(k) or 403(b) you will end up with because you're leaving your employer, consider all your options so you can make a decision that fits your circumstances. Although 401(k) and 403(b) plans differ in some ways, the information below applies to both.
What are your options?
Leave the money in the current 401(k) if an employer allows that option.
Roll the money over into an IRA.
Transfer it into your new employer's 401(k).
Take the money and pay any taxes and, perhaps, penalty due.
The option you select depends on a number of factors and how they apply to your situation.
Investment Choices
It takes a variety of investments that perform well and have reasonable expenses to grow your money over time. Any plan should include mutual funds split among equities (stocks) that present value and growth; small, medium, and large capitalization; and domestic and international companies. Bond funds also should be part of the mix, split among corporate and government; short-term, medium-term, and long-term; and corporate bonds of investment grade and high yields.
Check on performance and expenses in your plan's documents. Then compare that data with the rest of the market via Morningstar. If you're not satisfied, consider transferring your money into an IRA account with a low-cost brokerage firm like Ameritrade, Schwab, T.D. Waterhouse, or Vanguard. All offer a variety of investment choices.
Need the Money Now?
Your 401(k) and IRA accounts are meant for retirement, but what if you're in a temporary financial bind or are starting a business and need some cash? Loans from IRAs are not allowed, but loans from 401(k) plans are, provided the plan has a provision for it. If it's allowed, generally you can borrow up to $50,000 or half of your account balance, whichever i lower; repayment is by equal monthly payments over five years. If you terminate employment, the loan is due immediately. Check your plan documents or with your plan administrator for the specifies, including fees. If you default on the loan, income taxes are due, as is a 10 percent penalty for an early distribution. The loan interest you pay goes into your account because you are borrowing from yourself. But remember that you will be repaying the loan with after-tax dollars, and those same dollars will be taxed again when you start receiving retirement distributions.
Really Need the Money Now?
401(k) plans may have a hardship feature that allows withdrawal if you have a qualified hardship and you have exhausted other reasonable options. Withdrawals are taxable, and your ability to contribute to the 401 (k) is suspended for six months. Check out your plan documents for the details. IRAs do not have hardship withdrawal features, but you can take an IRA distribution and pay income taxes on that distribution. For both the 401(k) hardship withdrawal and the IRA distribution, if you are under 59.5% you will pay a 10 percent penalty, unless the money is for disability or certain medical expenses. In addition, a distribution from an IRA avoids the 10 percent penalty if it's used to buy a first home ($10,000 distribution limit), to pay qualified higher-education expenses, or to pay health insurance premiums if you are collecting unemployment insurance.
Periodic Distributions
What if you're not yet 59.5% and want to start taking distributions? If you terminate employment after reaching 55, your 401(k) may offer the opportunity to take distributions before 59.5%. These distributions are taxable, but the 10 percent penalty does not apply. Check your plan documents.
With an IRA, you generally have to wait until age 59.5% to take distributions without an early withdrawal tax penalty. However, distributions are taxable, but the 10 percent penalty does not apply. Check your plan documents.
With an IRA, you generally have to wait until age 59.5 to take distributions without an early withdrawal tax panalty. However, distributions can start earlier of they are part of a series of substantially equal periodic payments. These payments must continue for at least five years or until you reach 59.5, whichever happens later. Distributions are also penalty-free if they occur after death or disability.
Distribution to Beneficiaries
What happens to your 401(k) or IRA when you die?
After death, if your spouse is your 401 (k) beneficiary, they have several options, including continuing the 401(k) plan or rolling it over into their IRA. A nonspouse 401(k) beneficiary generally has to take a distribution for the entire balance (usually taxable) within a fixed time, usually five years. Again, details vary by plan, so check your 401 (k) plan documents.
With an IRA, your spousal beneficiary has similar options to continue the tax-deferred status. A nonspouse IRA beneficiary can stretch distributions over their lifetime. This benefit can be significant if your beneficiary is a child, as it teduces the immediate tax consequences and gives te money more time to grow.
Process Your assets
Federal law protects 401(k) plans from creditiors. IRA are governed by state law and may not be protected the same way.
Rollovers and transfers
If you rollover the 401 (k) to an IRA, don't have the check made out in your name - 20 percent will be taken out for federal income taxes. A direct transfer can help avoid this. Open your IRA first, then have the money transferred directly from your current 401 (k) to your new IRA. If your current 401 (k) cannot do this, then accept a check made out to the IRA, which avoids the 20 percent withholding, and then make sure it gets deposited into your IRA so it can begin working for you as soon as possible.
by: Annuity Zing
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