Dont Roll Over Employer Stock
There is one big exception to all of this. If you hold your company stock in your 401, it may make sense notto roll over this portion of the account. The reason is net unrealized appreciation , which is the difference between the value of the stock when it went into your account and its value when you take the distribution.
Youre only taxed on the NUA when you take a distribution of the stock and opt notto defer the NUA. By paying tax on the NUA now, it becomes your tax basis in the stock, so when you sell it , your taxable gain is the increase over this amount.
Any increase in value over the NUA becomes a capital gain. You can even sell the stock immediately and get capital gains treatment. The usual more-than-one-year holding period requirement for capital gain treatment does not apply if you dont defer tax on the NUA when the stock is distributed to you.
In contrast, if you roll over the stock to a traditional IRA, you wont pay tax on the NUA now, but all of the stocks value to date, plus appreciation, will be treated as ordinary income when distributions are taken.
Choose Your 401 Rollover Destination
Consider whether a traditional IRA or Roth IRA makes the most sense for your 401 rollover.
401 Rollover to Traditional IRA: If you want to maintain the same tax treatment, this can be a good choice, Henderson says. You avoid extra hassle, and you just see the same RMD and tax treatment as you would with your current 401.
401 Rollover to Roth IRA: For those with high incomes, the 401 rollover to a Roth IRA can serve as a backdoor into a Roth tax treatment. But dont forget about the taxes, Henderson says. In addition, remember the five-year rule when it comes to Roth accounts: Even at 59 ½, you cannot take tax-free withdrawals of earnings unless your first contribution to a Roth account was at least five years before. Those close to retirement, therefore, may not benefit from this type of conversion. Talk to a tax professional if youre rolling into an account with different treatment, says Henderson.
You Expect To Earn More Money In The Future
If you plan to earn lots of money in the future or earn a high income now you should consider rolling your funds into a Roth IRA instead of a traditional IRA. For single filers in 2016, the maximum income allowable for contributions to a Roth IRA starts at $117,000 and ends at $133,000. Learn more about Roth IRA rules and contribution limits here. For married filers, on the other hand, the ability to contribute to a Roth IRA begins phasing out at $184,000 and halts completely at $194,000 for 2016. The more you earn in the future, the harder it will become to contribute to a Roth IRA and secure the benefits that come with it.
Read Also: How Much You Need To Retire
Should I Roll Over My 401
Theres a lot to consider when deciding whether to roll over your 401 after a job change. The available options of keeping your account with your former employer or rolling it over into a new tax-deferred plan pose a number of pros and cons, all of which factor into the decision that you will ultimately make. A financial advisor can help guide you through this decision and others like it. Lets break down the reasons for rolling over and not rolling over your 401.
At Retirement Should You Roll Your 401 Into Your Ira Think About These Factors
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Dear Liz: I turned 70 last week and therefore I am leaving my part-time job after about 13 years. No big deal, but now that I am retiring I have a 401 worth about $60,000 and an IRA that is somewhere around $50,000. Should I roll my 401 account into my IRA or just let it sit there collecting dust? I do understand that at age 70½ I am supposed to start withdrawing some of the funds, but am not sure how much. It seems 70 years creeped up on me.
Answer: Years have a nasty habit of doing that.
You mentioned that youre retiring because youve achieved a certain age. Few jobs have mandatory retirement ages, though. If you dont retire, you can continue putting off required minimum distributions from your 401. You would still have to take minimum distributions from your IRA, unless your employer allows you to roll that money into your 401 plan.
But well assume youre happy with your decision. Rolling your 401 into your IRA isnt necessarily the best option. What you should do next depends on the details of both accounts.
Most large-company 401s allow retirees to take regular distributions, including required minimum distributions, from the plans. These plans also tend to offer low-cost institutional funds that may be a much better deal than those you can access as a retail investor with an IRA. If youve got a good 401 that allows retirement distributions, there may be no need to move your money.
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Roll Over Your Money To A New 401 Plan If This Option Is Available
If you’re starting a new job, moving your retirement savings to your new employer’s plan could be an option. A new 401 plan may offer benefits similar to those in your former employer’s plan. Depending on your circumstances, if you roll over your money from your old 401 to a new one, you’ll be able to keep your retirement savings all in one place. Doing this can make sense if you prefer your new plan’s features, costs, and investment options.
- Any earnings accrue tax-deferred.1
- You may be able to borrow against the new 401 account if plan loans are available.
- Under federal law, assets in a 401 are typically protected from claims by creditors.
- You may have access to investment choices, loans, distribution options, and other services and features in your new 401 that are not available in your former employer’s 401 or an IRA.
- The new 401 may have lower administrative and/or investment fees and expenses than your former employer’s 401 or an IRA.
- Required minimum distributions may be delayed beyond age 72 if you’re still working.
- You may have a limited range of investment choices in the new 401.
- Fees and expenses could be higher than they were for your former employer’s 401 or an IRA.
- Rolling over company stock may have negative tax implications.
Roth 401 To Roth Ira Conversions
If your 401 plan was a Roth account, then it can only be rolled over to a Roth IRA. The rollover process is straightforward. The transferred funds have the same tax basis, composed of after-tax dollars. This is not, to use IRS parlance, a taxable event.
However, you should check how to handle any employer matching contributions, because those will be in a companion regular 401 account and taxes may be due on them. You can establish a new Roth IRA for your 401 funds or roll them over into an existing Roth.
Read Also: What Income Is Taxed In Retirement
Keep Your 401 With Your Previous Employer
In this instance, you wont change a thing. Just make sure that you actively monitor your investments in the plan for performance and remain aware of any significant changes that occur.
If you really like your current investment options and are paying low fees on the investments, this might be the right choice for you.
Keeping The Current 401 Plan
If your former employer allows you to keep your funds in its 401 after you leave, this may be a good option, but only in certain situations. The primary one is if your new employer doesn’t offer a 401 or offers one that’s less substantially less advantageous. For example, if the old plan has investment options you cant get through a new plan.
Additional advantages to keeping your 401 with your former employer include:
- Maintaining performance:If your 401 plan account has done well for you, substantially outperforming the markets over time, then stick with a winner. The funds are obviously doing something right.
- Special tax advantages: If you leave your job in or after the year you reach age 55 and think you’ll start withdrawing funds before turning 59½ the withdrawals will be penalty-free.
- Legal protection: In case of bankruptcy or lawsuits, 401s are subject to protection from creditors by federal law. IRAs are less well-shielded it depends on state laws.
You might want to stick to the old plan, too, if you’re self-employed. It’s certainly the path of least resistance. But bear in mind, your investment options with the 401 are more limited than in an IRA, cumbersome as it might be to set one up.
Some things to consider when leaving a 401 at a previous employer:
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 does protect up to $1.25 million in traditional or Roth IRA assets against bankruptcy. But protection against other types of judgments varies.
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Roll Over An Ira To A : The Pros And Cons
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In the world of retirement account rollovers, theres one type that doesnt get much love: the IRA-to-401 maneuver, which allows you to roll pretax traditional IRA assets into a 401. Its frequently overshadowed by rollovers in the other direction 401 to a rollover IRA because theyre more common. But in some cases, this less common move is also worth considering.
Benefits Of A 401 To Ira Rollover
If your new employer doesnt offer a retirement plan or permit 401 rollovers, moving your money into an IRA is an alternative to leaving the assets with your former company.
More choices, more control: While your investment options will likely be limited within a 401 plan, an IRA will provide you virtually endless possibilities, including stocks, bonds, real estate investment trusts , mutual funds and more. An IRA gives much more control and freedom to invest your money how you want and when you want.
Lower fees: Because you will have myriad options for your money within an IRA, its possible that your investments will have lower fees than a 401 plan. By parking your money in passively-managed assets, like index funds and ETFs, you may reduce your expenses.
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Conversion To A Roth Ira
Anyone can convert a 401 to a Roth IRA once a year there are no income limits like there are with regular Roth IRA contributions. You also dont have to convert your entire 401 to a Roth IRA at once or even at all. You can split the rollover between an IRA and a Roth IRA if you wish.
A Roth IRA offers unique benefits, but a complete analysis should be done prior to the Roth conversion. Some of the key retirement planning considerations are:
- Do I expect my tax bracket to be higher in retirement than it is now?
- Do I have cash available to pay the tax without dipping into my Roth IRA or other retirement money?
- Does a Roth IRA conversion fit into my overall retirement planning and wealth strategy?
Tax Consequences Of A 401
As mentioned above, you generally wont have to pay any taxes on your 401-to-IRA rollover. The only time youll have to deal with taxes is if you have a traditional IRA and want to roll over to a Roth IRA.
One other tax consideration: You can choose to do a direct or indirect rollover. For a direct rollover, your old plan sends the money directly into your new IRA. In an indirect rollover, your old plan sends you a check with the cash and withholds 20% of your funds. These withheld funds are a taxable distribution unless you make up the difference out of pocket. Youll likely have to pay a 10% fine for the early withdrawal. This rule only applies if the check is sent directly to you, though. It doesnt matter if your old plan sends you a check to forward to your new IRA.
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How To Pick An Ira To Roll Over To
The most important question you need to ask is whether you want to start a traditional IRA or a Roth IRA. Traditional IRAs work much like traditional 401 plans. You contribute money before you pay taxes. The 2021 maximum contribution limit for traditional and Roth IRAs is $6,000.
With a traditional IRA, the money you contribute is deducted from your taxable income for the year. When you reach retirement, the money is taxable as you withdraw it. A Roth IRA, however, works differently. You contribute money post-taxes. The money is then not taxable when you withdraw it in retirement. If you think you might want to keep contributing to your new IRA after the rollover is complete, its important to decide which type of IRA you want.
Its also important to consider the tax implications. If you have a traditional 401 plan, that means you didnt pay taxes on the money when you contributed it to your account. If you want to move that money into a Roth IRA, youll have to pay taxes on it. You can roll over from a traditional 401 into a traditional IRA tax-free. Same goes for a Roth 401-to-Roth IRA rollover. You cant roll a Roth 401 into a traditional IRA.
Should You Roll Over Your 401 To An Ira
Millions of Americans have changed jobs over the past year. And while career change can be exciting, it can also raise many questions, including: Should I roll over my 401 plan into an IRA?
Retirement plans like 401s, 403s and IRAs qualify for tax benefits. That makes them an appealing way to save for retirement. But it also means there are rules about how you can use them. When you leave a job, many times you can leave retirement funds in your former employerâs plan. But you could also opt for a rollover, which allows you to move the funds while retaining their tax benefits.
Sometimes a rollover is beneficial because it allows you to consolidate retirement accounts, keeping everything in one place. But there are a number of other pros and cons you may want to consider before rolling 401 funds into an IRA.
These tips can offer some guidelines to help you determine if rolling over your 401 to an IRA makes sense for you.
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When Does A Roth Conversion Make Sense
Now, there is one other type of rollover we need to talk about: a Roth conversion. That happens when you roll over money from a traditional 401 into a Roth IRA.
Heres how it works: When you put money into your traditional 401, you used pretax dollarsthat means it hasnt been taxed yet. So, when you transfer that pretax money into a Roth IRA, which is funded with after-tax dollars, youll have to pay taxes on that money now. Thats the bad news.
But the good news is that from now on, that money will grow inside your Roth IRA tax-free and you wont pay any taxes on that money when youre ready to withdraw from the account in retirement. A Roth conversion might feel like ripping off a Band-Aid now, but itll feel great once you retire.
You might want to seriously consider doing a Roth conversion only if you can afford to pay the tax bill with cash you have saved up. But be careful, because a conversion could add thousands of dollars to your tax bill. If thats just too much for you to stomach, then stick with a traditional IRA rollover.
This is a big decision, and you dont have to make it alone! Get in touch with a tax advisor who can help you understand the tax implications of a Roth conversion and help you decide which option might work best for you.
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