Free Financial Planning Advice » Retirement

Understanding 401k Rollover To Roth IRA

admin — Sun, 05 Sep 2010 13:04:55 +0000

Retirement can be exciting. Yet, as you begin to make plans for retirement, one of the decisions that you’ll have to make is what action to take with your 401k plan. Your 401k is the fund you and your employer have been setting aside for the past number of years. When you leave your employer (or turn retirement age), you can begin to deal with that fund without negative repercussions. To make educated decisions, you should definitely know the 401k rollover to Roth IRA rules.

Originally, rolling over to a Roth IRA was a complicated and indirect process. First, you had to open a traditional IRA. Only then could you convert the traditional IRA to a Roth IRA and finalize that rollover. The funds had to be under $100,000. Since January 2008, however, the rules have changed.

Now, it is sometimes an option to do the rollover 401k to Roth IRA directly. Not every 401k plan, however, makes it so simple. Some retirement plans make it possible with the mere check of a box on a single form. Others still do require you to first open a traditional IRA and then perform the transfer. It can be a reasonable hassle.

Beginning right now, however, in January 2010, it is supposed to be possible to convert every traditional IRA into a Roth IRA. The amount you convert will be taxed, but that bill can also be spread over three years.

If your employer sends you your distribution check from the 401k, most likely 20% will be held to cover taxes. You can ask your employer to send all the distribution directly to your new rollover IRA account. Do realize, however, that you have a limited amount of time to complete the rollover from 401k to Roth IRA. Sixty days, or no deal! Definitely do not procrastinate.

The most convenient way to do the rollover is if your employer offers a Roth 401k. In this case, there is absolutely no need for any conversions. The Roth 401k rolls directly into the Roth IRA. No hassle. No complications.

Basically, the main thing to make sure is that you have a Roth IRA open and established before you attempt to perform any rollovers. The process is a taxable event, so consult with your personal advisor in order to avoid any surprises. Restrictions may apply. Don’t take any action that will result in unnecessary penalties. And good luck!

401k Rollover Rules: Get Familiar

Chava — Wed, 30 Dec 2009 20:08:06 +0000

A 401k Plan is an excellent investment toward retirement. Basically, it is a plan established by employers through which eligible employees can make a salary reduction on a post and/or pre tax basis. That salary reduction is deferred into a retirement fund. The employers can make contributions on behalf of employees. They can also add a profit sharing feature to the plan. Some plans allow employees to choose from certain investment products, others restrict that privilege to professionals hired by the employer. The expectation is that by the time retirement age is reached, the 401k has grown into a sizable fund for post employment.

There are situations that call for a 401k rollover. This is a direct transfer of assets between retirement plans. For example, if you change employers or retire, and want to rollover between 401k’s, IRAs, or TSAs. Also, a surviving spouse may want to transfer assets from the deceased spouse’s account.

What are the 401k rollover rules?

1. You can take a cash distribution. The check is made payable to you, and the money is subject to income taxes; your employer withholds 20% as prepayment of estimated taxes. This 20% is an estimate only. When you complete your tax return, it is adjusted appropriately.

2. If you claim your cash distribution, or withdraw, before the determined retirement age, that distribution is subject to a 10% pre mature withdrawal penalty.

3. An indirect rollover is the second choice. In this case, you take the cash distribution and deposit it into your IRA within 60 days. 401k IRA rollover rules dictate that to avoid taxes and penalties, the entire distribution (including 20% withheld by employer) be deposited into your IRA. Any amount not deposited within 60 days will be subject to taxes. Further penalties fall under the jurisdiction of IRS 401k rollover rules.

4. You can choose a direct rollover. This is an authorization for your employer to make your check payable to the new custodian for the benefit of your IRA (FBO your IRA). This is a trustee to trustee transfer. No tax percentages are withheld. No taxes. No penalties. Your retirement fund continues to grow. For most people, this is the safest and most advisable rollover plan, as you avoid tax liabilities and penalties.

5. The Roth 401k rollover rules dictate that a transfer from a Roth 401k may be made only to a Roth IRA.

Investing After Retirement

Chava — Thu, 17 Dec 2009 10:00:50 +0000

For many people, retirement holds a mixture of feelings; relief, excitement, and apprehension being very common. Letting go of the 9 to 5 job is wonderful. But without a significant steady income, how do I ensure safe use of my money? Is there any way to make my savings grow? Is investing after retirement out of the question?

There are two things here that need to be addressed. First: keeping your money safe and secure. After that, you can think about investment options. Some tips for saving money include taking advantage of every senior discount possible, looking for part time jobs that won’t harm your social security, minimizing life insurance, and make sure you’re not paying unnecessary fees and charges on any bank accounts. One piece of very sound advice is to use your retirement funds and savings in a tax savvy way. For regular expenses, try to withdraw from non retirement savings (like CD’s and money market accounts), since you’ve already paid taxes on them. Rolling your IRA account and 401(k) into a single annuity will pay a monthly income, and when your other savings are depleted, you’ll have what to feed from.

The more exciting question is about investment after retirement. Don’t get your blood pressure up, however. Most financial advisors recommend conservative investing after retirement, since you don’t have the same luxury of making up lost money with a typical high paying job. Stable investments after retirement include bonds, certificates of deposit (CD’s) and money market accounts. They don’t offer high annual percentage yield (APY), but they are more secure. In retirement, this is more advisory than giving in to the temptation of putting a large retirement savings into a risky investment that might offer a high yield in a short time. Because it might not. You might lose it.

If you can’t fight the urge for something more speedily lucrative, you can consider things like blue chip stocks (investments that pay dividends), or conservative mutual funds. There is no guarantee that you’ll make money, and you might lose. But if there is growth, it will usually be larger.

The decision is yours. Enjoy the prospects!