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Deductibility Limits on Traditional IRA Contributions & IRA Contribution Limits from 2002 to 2012
Hardship Withdrawals and Accessing 401(k) Loans
401(k) Rules – Contribution Limits, Catch-Up Contribution Rules, Vesting Rules, 401k Eligibility Rules
Salary Deferral Contributions Made to 401(k) Retirement Account
Important Year End Statements for Individual Retirement Account (IRA) Holders
5 Things Every 401(k) Plan Should Have
The Roth 401(k) – How After-Tax Contributions Work, Comparisons with Roth IRA, Future Tax Rates, Contribution Limits & Frequently Asked Questions
What is a Traditional IRA? History of IRAs, Eligibility Requirements, Ineligible Compensation, Distributions from a Traditional IRA & How Income Tax Deductions Work
How to Invest in Real Estate using your Individual Retirement Account (IRA)
Rolling your 401(k) – Trustee to Trustee Direct Rollover, Modified Adjusted Gross Income (MAGI) Income Limits for Deductible Contributions to a Traditional IRA
401(k) Vesting – How It Works, Vesting Schedule, Number of Years of Service
401(k) Lump Sum Distributions – Tax Advantages, Rollover to IRA, Tax Deferred Contributions and more
401k Rollovers to an Individual Retirement Account (IRA) – Things to Consider Before You Rollover, Avoid Transfer Penalties, Move Employer Stock, etc.
401(k) Withdrawals – Early Withdrawal Penalties, Rollover Withdrawals, Exceptions and Tax Consequences
Understanding the Rules for Participating in a 401(k) Plan, Beneficiary Appointment, 401(k) Plans for High Paid Employees

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IRA Rollover – Frequently Asked Questions about IRA Rollovers

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IRA Rollover Related Information

1) What is an IRA Rollover?

The IRA is a tax specialized account designed to receive funds rolled over from a 401(k) to a self-managed Individual Retirement Account (IRA). Rollover funds can also be derived from 403b, 457 plans and other profit sharing plans. The IRA allows funds in to grow tax-free and penalty free when rolled over until withdrawn during retirement.

2) When is the best time for an IRA Rollover?

The best time to do an IRA rollover is when changing employers or jobs. This question is faced by millions of Americans when they change jobs, what will they do with their 401(k) account left with their old employers? One option is to leave the money in the old employer’s plan and let it grow tax-deferred until retirement; however most employees would like to move their 401(k) accounts to where they are going because who knows what will happen to a company after they lay you off or if you quit? In such circumstances, an IRA rollover is the best option. It is the best option because if you do a direct rollover (trustee to trustee transfer), you will avoid the 20% withholding penalty imposed by the IRS as well as a 10% early withdrawal penalty if you take the cash with you and do not move it to another retirement account, such as the IRA itself.

3) Is there a limit on the amount that can be rolled over?

No there is no limit when you rollover funds from a 401k to an IRA. Therefore, it doesn’t matter if you rollover $100,000 or $1 million, you can still rollover the full amount. Also, having one IRA rollover is better than managing several retirement plans after a job change. Also, an IRA offers many more investment choices than an employer sponsored 401k plan that could only offer employer stock and not a diverse set of investments. For instance, Fidelity offers 4600 mutual funds rated 4- and 5- star by Morningstar1 which is a whole lot more choices than what a 401k plan can ever offer.

4) What happens if I take Cash when I leave my Old Employer?

If you take cash when you leave your old employer instead of doing an IRA rollover, your employer will withhold 20% of your funds (yes you will only get 80% of your money) and submit it to the IRS. Thus, if you have $100,000 in your 401(k) that is made payable to you in a check, your employer will withhold $20,000 for remittance to the government. Thus, in order to bring your balance up to $100,000 in your new account, you will have to pay from your own pocket, an additional $20,000 within 60 days of receiving the distribution. The IRS will then return the $20,000 owed to you when you file your tax return upon correct completion of your rollover. What makes this worse is that the $100,000 will be included in your W-2 IRS form as income. Also, a 10% early withdrawal penalty will be levied in the next April 15 because you will have taken a premature early distribution from your retirement account.
Note: The IRS is very strict on this 60 day distribution rule and there are no exceptions.

5) How do I avoid the 20% withholding tax?

The best way to avoid the 20% withholding tax is to do a direct IRA rollover (also known as a trustee to trustee transfer). With this type of rollover, the money goes directly from your 401k plan into another tax-deferred account, either an Individual Retirement Account (IRA) or your new employer’s 401(k) plan, 403(b) plan or 457 plan. 403(b) plans are generally for teachers, educators and non-profit employees while 457 plans are offered by local state governments. With a direct 401k rollover, you do not have to pay any taxes on the money when it comes out of your old employer’s 401(k). The money will also continue to grow tax-deferred in the new account.

6) Why can’t I simply rollover from my old employer to my new employer’s 401(k) plan?

You can definitely do this, but note that you will not have as many investment choices as an IRA can offer. In the example above, Fidelity offers over 4600 4 and 5 star mutual funds (rated by Morningstar) that you will not have available through your new employer’s 401k plan. In fact, you might only be limited to your employer’s stock. Also, at an IRA brokerage such as Fidelity, you will get your own investment advisor that knows finance and investments and can help you manage your money, while your employer’s 401(k) plan might not offer such services as the administrative costs can be very high.



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