Can A Traditional Ira Be Rolled Into A 401k

Youll Lose Control And Flexibility

The most significant benefit of an IRA is the power and flexibility to invest your money how you want. By rolling over your IRA, youll be forfeiting a lot of that control and freedom. Your 401 plan likely offers a limited number of mutual funds and exchange-traded funds, so you may feel restricted by those offerings if you value greater diversification and oversight.

Reasons To Rollover An Ira To An Annuity

You can transfer an IRA to an IRA Annuity without a tax consequence, just like rolling over to a 401. Often debated among financial experts is whether an annuity should ever be used in a tax-qualified 401. Like an IRA, annuities provide income tax deferral. Therefore, placing an annuity inside a qualified retirement plan may initially seem redundant.

That might be true if an annuitys only benefit is tax deferral. But, the fact is, annuities offer many advantages, whether held inside or outside of an IRA.

Annuities are flexible investment products that can help you achieve your long-term financial goals and provide a source of retirement income. Tax deferral alone is not a sufficient reason to use an annuity in a tax-qualified plan. But income options, death benefit protection, investment selections and services, and flexibility are benefits an annuity can bring to any IRA.

Why Roll Over An Ira Into A 401

There are a few reasons you might want to roll a traditional IRA into a 401, though it should be noted you can do this only if your company plan accepts incoming transfers . Here are the pro IRA-to-401 rollover highlights:

Compare costs among your retirement plans to find out where youre getting the better deal.

• Protection against creditors: 401s have protections against creditors that IRAs dont provide, including in bankruptcy and against claims from creditors. IRAs are protected in bankruptcy up to a limit of $1,283,025 dont ask us why the amount is so exact across all plans. IRA protection from creditors may vary by state.

• You may be able to put off distributions if you work longer: A traditional IRA requires minimum distributions to begin at age 70½. A 401 does, too the IRS wants to get its hands on the taxes you owe when you take those distributions, because theyve been deferred since the contributions were made but if youre still working, you can postpone distributions from a 401 until you retire.

• 401 loans: These are, lets be clear, a last resort. But if youre in dire need of money and you have nowhere else to get it, a 401 might offer you the option to take a loan from your own account, then pay yourself back with interest.

» See how a 401 could improve your retirement: Try our 401 calculator.

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Direct Vs Indirect Rollovers

A direct rollover is when your money is transferred electronically from one account to another, or the plan administrator may cut you a check made out to your account, which you deposit. The direct rollover is the best approach.

In an indirect rollover, the funds come to you to re-deposit. If you take the money in cash instead of transferring it directly to the new account, you have only 60 days to deposit the funds into a new plan. If you miss the deadline, you will be subject to withholding taxes and penalties. Some people do an indirect rollover if they want to take a 60-day loan from their retirement account.

Because of this deadline, direct rollovers are strongly recommended. In many cases, you can shift assets directly from one custodian to another, without selling anything. This is known as a trustee-to-trustee or in-kind transfer.

Otherwise, the IRS makes your previous employer withhold 20% of your funds if you receive a check made out to you. It’s important to note that if you have the check made out directly to you, taxes will be withheld, and you’ll need to come up with other funds to roll over the full amount of your distribution within 60 days.

To learn more about the safest ways to do IRA rollovers and transfers, download IRS publications 575 and 590-A and 590-B.

Rollover To A Traditional Ira

Transferring funds between a traditional 401 and a traditional IRA or between a Roth 401 and a Roth IRA is relatively straightforward. In many cases, you can do a direct rollover, also called a trustee-to-trustee transfer. This involves your 401 provider wiring funds directly to your new IRA provider. Alternatively, your 401 provider may send you a check that you then deposit into your new IRA.

Look out for any taxes your provider may have preemptively deducted. You shouldnât owe any taxes or penalties as long as you deposit money in a tax-advantaged retirement account within 60 days.

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You Prefer Convenience Over Control

Perhaps you opened an IRA with the intention of putting together a diverse portfolio and actively managing your investments. However, youre now finding that you dont have the time or energy to devote to your portfolio and feel that youre in over your head. Rolling over your IRA to a 401 and giving up some control may better fit your needs as an investor.

What Is A Rollover Ira

A rollover IRA is identical to a Traditional IRAor Roth IRA in the case of rolling over Roth 401 fundsexcept that the source of the money is not annual contributions. Instead, the money that goes into a rollover IRA is money from a previous retirement plan, such as a 401 plan. If you do not already have an IRA, you may open one for the purpose of rolling over your 401 funds without making any additional annual contributions. On the other hand, if you do have an IRA, you are permitted to roll over your 401 into that existing contributory IRA account.

It is important to note, however, that you may not combine traditional IRA and 401 funds with Roth IRA and Roth 401 funds.

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Take A Cash Distribution

While withdrawing all of your money may seem like a good idea in the short-term, be sure you understand the consequences before you do. Money withdrawn will be taxable and subject to a mandatory 20% federal withholding rate. You may also face early withdrawal penalties.

Pros

• Having the cash could be helpful if you face an extraordinary financial need.

Cons

• Taxes and penalties for taking a cash distribution may be substantial.
• Withdrawals before age 59½ may be subject to a 10% early withdrawal penalty and will be taxed as ordinary income.
• Your savings will no longer grow tax-deferred.1
• Withdrawing your money may impact whether you have enough money for retirement.

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Take Caution With Indirect Rollovers

Rollovers may be done as direct or indirect, but they are not managed the same.

Direct – A direct rollover is where the funds are transferred directly from one retirement account to another as the owner you never touch the funds. Doing a direct rollover avoids this negative consequence that may come with an indirect rollover.

Indirect â As the owner you can receive a distribution of your account balance from the plan instead of arranging for a direct rollover. This might not be the best idea. If you take a distribution, the plan administrator typically withholds 20% of the distributable amount for federal income taxes. The 20% is returned in the form of a tax credit in the year the rollover process was completed. When you do this indirect rollover, you can increase the rollover amount, from your own funds, equal to the 20% withholding amount. If you roll over the amount of the check you receive without adding that 20% back, then the amount withheld will be treated as a taxable distribution. You will generally have to pay income taxes on that amount as well as a 10% penalty tax if you are younger than 59 1/2. Also, when you take the cash directly, the IRS only allows you 60 days from the date of receipt of the funds to rollover the funds to another plan or IRA.

Additional rollover caveats

Reasons You May Want To Roll Over Now

• Diversification. Investment options in your 401 can be limited and are selected by the plan sponsor. Rolling your funds over into an IRA can often broaden your choice of investments. More choices can mean more diversification in your retirement portfolio and the opportunity to invest in a wider range of asset classes including individual stocks and bonds, managed accounts, REITs and annuities.
• Beneficiary flexibility. With some IRAs, you may be able to name multiple and contingent beneficiaries or name a trust as the beneficiary. Other IRAs may allow you to impose restrictions on beneficiaries. These options aren’t usually available with 401s. But, keep in mind, not all IRA custodians have the same rules about beneficiaries so be sure to check carefully.
• Ownership control. You are the owner and have access rights with an IRA. The assets in your IRA are also not subject to blackout periods. With a 401 plan, the qualified plan trustee owns the assets and assets may be subject to blackout periods in which account access is limited.
• Distribution options. If your IRA is set up as a Roth IRA, there is not a set age when the owner is required to take minimum distributions. With 401 plans and traditional IRAs, the owner will have to take required minimum distributions by April 1 of the year after they turn age 72.

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Taxes On Roth Ira Conversions

One of the biggest reasons investors gravitate toward Roth IRAs is the tax benefit. The money is put into the account after tax, so when its time to retire, youll be able to take the money out tax-free. That makes the Roth IRA a natural contender for rolling over 401s since it allows you to enjoy tax-free distributions during your golden years.

However, its important to understand the rollover 401 to Roth IRA tax consequences. You didnt pay taxes when you put money into your 401, with the understanding that youd pay when you took it out. A Roth IRA is funded with money youve already paid taxes on, which is why you dont pay taxes when you take it out. This means that the IRS has to get its money now, when youre putting the money into the Roth IRA account.

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Which Types Of Distributions Can I Roll Over

IRAs: You can roll over all or part of any distribution from your IRA except:

Retirement plans: You can roll over all or part of any distribution of your retirement plan account except:

Distributions that can be rolled over are called “eligible rollover distributions.” Of course, to get a distribution from a retirement plan, you have to meet the plans conditions for a distribution, such as termination of employment.

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How To Roll Over A Pension Into An Ira

Private sector employers that once offered workers traditional pensions, typically defined benefit plans, have been encouraging people to roll over their pensions into tax-advantaged plans like individual retirement accounts and 401s. If youre considering such a move, its important to understand your options, the pros and cons of each option and the tax-related rules about such a move. Before you do anything, though, consider working with a financial advisor who can help you make the best choices.

During the 1980s, 60% of private-sector companies offered their workers traditional pension plans, which were usually defined benefit plans. As the years have passed and employees stopped staying with the same company for life, the defined benefit plan is going the way of the dinosaur. Today, only 4% of private companies offer defined benefit plans.

As private-sector companies have discontinued their traditional pension plans, they have encouraged workers to launch a pension rollover to an IRA. Some have replaced the defined benefit plan with a 401, a defined contribution plan. They have encouraged their workers to either roll over their pension money to the new 401 or initiate a pension rollover to an IRA.

Are There Tax Implications Of Ira Rollovers

Depending on how you move your money, there might be tax implications. If you move your money into an account with the same tax treatment as your old account, there shouldnt be issues as long as you deposit any checks you receive from your 401 into a tax-advantaged retirement account within 60 days. However, if you move a traditional 401 into a Roth IRA, you could end up with a tax bill. Check with a tax professional to find out how you may be affected.

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Why You Might Not Want To Combine Your Ira With Your 401

On the flip side, there are plenty of areas where a traditional IRA has a leg up on a 401 that is, of course, why so many people roll a 401 into an IRA. Here are the biggest you should know:

• Wider investment selection: Within an IRA, you can invest in nearly anything under the sun not just the mutual funds, index funds and exchange-traded funds that show up in 401 plans, but also individual stocks and even options . You can also shop around for the absolutely lowest-cost funds, which can save you money. As noted above, you should look closely at your 401 plan and its investments to see if youd save money by leaving your funds in your IRA.

• More loopholes for early withdrawals: Aside from the aforementioned loans, a 401 may allow hardship withdrawals in certain situations the IRS defines hardship as an immediate and heavy need, which means things like unreimbursed medical expenses, funeral expenses or disability. Those will waive the 10% penalty on early distributions youll still owe income taxes on the withdrawal. But a traditional IRA casts a wider net, allowing early distributions without penalty but with taxes still owed for higher education expenses and a first-time home purchase .

• Low-cost options for investment management: If your 401 plan doesnt come with anything in the way of investment advice, and you want that sort of thing, youll have more options for getting it on the cheap within an IRA if youre open to a robo-advisor. .)

Rollover To An Ira Can Mean Tax

If you rollover to an IRA you may have a wide choice of investment options, including choices that employers might not offer, such as mutual funds, annuities and bank CDs. This option allows your funds to continue growing tax-deferred. And you can simplify your financial life by moving the account to a company where you already have funds or even into an existing IRA.

If you choose a Traditional IRA, you wont pay any taxes when you conduct a rollover. If you roll money into a Roth IRA, youll be taxed on the money going into the account, but pay no federal income taxes when you withdraw the money . Money from a Roth 401k can be rolled into a Roth IRA tax-free.

When rolling over a 401k balance into an IRA its important to do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees and any potential penalties.

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Report The Rollover On Your Tax Return

For both direct and indirect rollovers, you must report the transaction when you file your annual tax return. Your IRA brokerage will send you form 1099-R, showing the amount you withdrew from your IRA. Report this number on your 1040 tax return on the line labeled “IRA Distributions.” The “Taxable Amount” you record should be zero. Select “rollover” as the reason why.