Someone recommended for me to move my $401k to an IRA. What is an IRA & how does it work?

Question

I got laid off my job and I do not want to withdrawal my money, because I know I will be penalized. What would you do?

Answer 1

You can do a number of things... the most important thing though, is to avoid having the money leave your retirement account and end up in your bank account. This will be classified as a pre-mature distribution by the IRS and result in a mandatory 20% withholding, and full taxability on your tax return for that year, in addition to a 10% penalty.

You want to do a "trustee to trustee" transfer which means it goes directly from the 401k to the company (a brokerage house, mutual fund, bank etc.) that ALREADY HAS AN IRA set up for you. You want the check made out to that institution, FBO (for the benefit of) you.

If you use a broker, investment advisor, or mutual fund company, they are very familiar with this transaction and will take care of most of it for you.

If you accidently do get a distribution, you have 60 days to put that money into an IRA, plus you have to come up with the 20% they withheld. You will then get the original 20% that was withheld back when you file your return. Try and avoid this.

Sometimes a distribution will happen without you being aware because your 401k provider does automatic distributions if your balance is below a certain amount. So you'll want to call and ask if that is going to be a problem for you. If you have over $5,000 in the 401k, it usually isn't a problem, and you can in fact leave your money there as long as you like.

Additionally, if you roll your balance over to a Roth IRA, it is also considered a conversion, and you have to pay tax on the whole amount. Roth IRA's are very cool, but may not be the best place to go with a rollover.

The big benefit in rolling it over is greater control, a wider variety of investment choices, and potentially lower investment management costs.

Good luck!

Ken Clark
Certified Financial Planner

www.KenClarkCFP.com

Answer 2

An IRA is a basket where you must put your 401K investments when you leave the job. Paperwork wise it's not much different than opening a checking account. There is often around a $25 fee to have such an account which can be opened by brokerage companies, mutual fund companies and even some banks. You go to one of those places, open up an account, tell the person at your old work (or get a hold of your 401K representative) that was handling the 401k at your work's end. You will probably have to fill out a form on how to send that 401K money to your new IRA account. You can add to that per year and the IRA representative will tell you how much you can put in per year and when and how much you are to withdrawal.

Answer 3

You can leave it where it is or roll it to an IRA (individual retirement account) without penalty.

Contact any big mutual fund company (like Fidelity) and they can facilitate the rollover for you.

If you are happy with the investment options in your current plan, and if you are allowed to leave it there, then simply leave it.