Ask Kim
401(k) Rollovers
If you have money hanging out in an account with a former employer, move it into your new 401(k), IRA or Roth IRA.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
November 19, 2009
Is it possible to roll over the funds in a 401(k) account with my old employer into the 401(k) I have with my current employer? It’s been four years since I left my old job. If a rollover to my current 401(k) is not an option, can I move the money to an IRA? My husband and I have an annual gross income of about $200,000. Do I even qualify for an IRA?
Ask your employer about its rules for accepting rollovers from other 401(k)s. Employers aren’t required to let workers roll 401(k) money from other company plans into their current 401(k)s, but virtually all of them allow it, says David Wray, president of the Profit Sharing/401(k) Council of America.
Related Links
- The New Roth Rollover Rules Explained
- More Roth Rollover Answers
- A Sweet Deal on Roth IRA Conversions
You could roll over the money into a traditional IRA. Starting in 2010, you could even roll it directly into a Roth IRA.
The rules changed in 2008 to allow direct rollovers from a former employer’s 401(k), 403(b) or other tax-qualified plan into a Roth IRA for people with modified adjusted gross income of less than $100,000; before that, you needed to roll the 401(k) money into a traditional IRA and then covert it to a Roth. Beginning in 2010, anyone will be able to roll money directly into a Roth, regardless of his or her income (see The New Roth Rollover Rules Explained and More Roth Rollover Answers for more information.)
You’ll generally owe taxes on the entire conversion if you made only pretax contributions to the 401(k), but a special rule lets you avoid the tax bill if you made after-tax contributions to the 401(k) and are rolling over to the Roth only those after-tax contributions. See A Sweet Deal on Roth IRA Conversions for more information.
When deciding whether to shift the money to your new employer’s 401(k) or move it to an IRA, compare the investing options and fees. You’ll have more investing options with the IRA, but with the 401(k) you may get a break on fees and can consolidate more money in one place.
Reader Comments (3)
Posted by: Noreen at 11/19/2009 02:51:58 PM
My husband just lost his job, what happens to his 401k? He may just work out of our home, so what can I do with his 401k then? Is cashing out a possiblity?
Posted by: Arica at 11/20/2009 10:27:16 AM
Our family lives in Alaska and our children recieve PFD checks that we must report as income on our taxes. My husband and I would like to save their checks in a college fund, but would like some type of tax benefit now. Is it better for us, tax wise, to open up IRA's as a means to save for college which may provide a tax benefit to ourselves, or is a 529 savings plan the best for them, even though it costs us on our taxes now?
Posted by: dan at 11/20/2009 01:59:00 PM
Kim, You need to inform readers that if you don't tell your former employer to do a "direct rollover" to a new 401k, IRA or Roth, the firm will probably take out 20% or more and send it to the IRS BEFORE you get to roll it to your employer or IRA or Roth. You will not be able to get that amount back and so that amount will be subject to tax and penalty if you are under 59.5 years. To avoid any tax and penalty, you must not take possession of the money. Some employers are not familiar with a direct rollover where they must send the money to the plan trustee. irs.gov/publications/p590/ch01.html#en_US_publink10006222