Transferring 401k Funds To A Spouse
Because all rollovers must occur between accounts with the same owner and taxpayer ID numbers, there is no way to directly roll over funds to a spouse’s 401k. Even though an unlimited amount of money may be transferred between spouses tax-free, contributions to 401k plans may only be made via salary deferral. The only way to get money from one spouse’s 401k to another is to withdraw funds from one 401k plan while increasing the withholding going to the other spouse’s 401k plan.
Exposing Assets To Creditors Unnecessarily
Defined contribution plans provide more credit protection than IRAs
If creditors might be coming after you, then youll need to plan accordingly. ERISA protects most employer plans, like 401 plans, from creditors. This includes bankruptcy and non-bankruptcy situations. However, once those assets move from a 401 plan to a non-ERISA plan, like an IRA, the rules change. In this case, those assets would be protected under federal law in a bankruptcy case . However, in a non-bankruptcy case, state rules might apply instead.
If either bankruptcy or creditor action appear to be on the horizon, youll want to discuss your options with your attorney, or a bankruptcy attorney licensed to practice in your state.
Opening An Inherited Ira
You can convert the existing IRA or 401 account into what’s called an “inherited IRA.” This may be a good idea if you’re not yet 59 ½ and want access to the funds without an early withdrawal penalty.
You might need to take required minimum distributions each year. The exact amount of the RMD will be based on your statistical life expectancy. If your spouse was older than 72 at death, you must begin taking RMDs by the end of the calendar year following your spouse’s death. If your spouse was younger than 72, you may be able to wait until your spouse would have turned 72 and been required to make withdrawals.
If you want to open an inherited IRA, it’s important that you NOT take out money from the account. The transfer must be made directly from the old account to the new one, in what is called a “trustee to trustee” transfer. Otherwise you could owe income tax on the money.
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How To Start A 401 To Ira Rollover
Doing a 401 rollover to IRA isnt terribly difficult. Once youve figured out exactly which IRA you want to use, set one up with that company. You can do this online, just like youd start any other financial account.
Next, get in touch with the financial company managing your 401. Ask if they have any special rollover requirements, and assuming youve met all of them, have a check for your assets mailed to the company you opened an IRA with. That company will then deposit it in your account. Youve officially completed your rollover!
If You Inherited A Traditional Ira From Your Spouse
There are two primary types of IRAs you can inherita traditional IRA or a Roth IRA. If you inherit a traditional IRA from your spouse, you have three primary choices:
The Internal Revenue Service has specific rules for each situation. Also, the rules for Roth IRAs are different from traditional IRAs.
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Why Transfer Your 401 To An Ira
Why would you move savings from an old 401 plan to an IRA? The main reason is to keep control of your money. In an IRA, you get to decide what happens with the funds: You choose where to invest and how much you pay in fees, and you dont need anybodys permission to take money out of the account.
More Control
Cost and providers: In your 401, your employer controls almost everything. Employers choose vendors for the plan, which determines the investment lineup available. Those might not be investments you like, and they might be more expensive than you want. If you want to practice socially-responsible investing, the 401 may lack options for that.
Timing: 401 plans also require extra steps when you want to withdraw funds: An administrator needs to verify that you are eligible to access your money before youre allowed to take a distribution. Plus, some 401 plans dont allow partial withdrawalsyou might need to take your full balance.
Easy Withdrawals
If you need access to your 401 savings for any reason, its easier when the money is in an IRA. In most cases, you call your IRA provider or request a withdrawal online. Depending on what you own in your account, the funds might go out as soon as the next business day. But 401 plans might need a few extra days for everybody to sign off on the distribution.
Complicated Situations
Control Tax Withholding
Should You Roll Over Your 401
To start, its worth knowing that you dont have to make a 401-to-IRA rollover, even if you do leave your job. You have the option of leaving the money youve invested in the plan at your old company. You cant keep contributing to it, but it will stay invested and if your investments go up, youll continue to see your account grow. This is called an orphan account.
Do you like the way your money is invested currently? If so, you may want to consider keeping your money in the existing plan. If you currently arent working but anticipate taking a new job soon, you could leave your money at your old plan temporarily and put it into your new companys plan once you have access to it.
For those who dont think theyll end up in another 401 plan but still want to save more for retirement, it might make sense to do a 401-to-IRA rollover. Remember, even though you still have your account at your old companys 401, you wont have the ability to make more contributions.
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Rolling Over The Account Into Your Own Ira
Only surviving spouses can roll over inherited assets into their own IRAs. If you do this, the money is treated just like your own IRA. You can make contributions to the account and the withdrawal rules are the same as if you had created the account in your name originally. If you’re inheriting a traditional IRA, SEP-IRA, or 401, you must roll it over into a traditional IRA if your spouse named you the beneficiary of a Roth IRA, you can roll it over into your own Roth IRA.
Traditional IRA
The big benefit of rolling over a traditional IRA is that your required minimum distribution the amount you must take out annually after you reach age 72is based on your own age. So if you were younger than your spouse, rolling over the account to your own IRA gives you the advantage of more tax-deferred growth. For example, if your spouse was over 72 and already required to take distributions, but you are under 72, you will not yet be required to take distributions. Even if you are over 72, your RMD amount would be smaller if you were younger than your spouse, since the amount is based on your statistical life expectancy.
If you’re under age 59 ½ and think you’ll need to withdraw money, however, don’t roll over the account. Because a rolled over account is treated just as if it were originally your own, if you withdraw money before you’re 59 ½ you’ll be subject to a 10% early withdrawal penalty. If you converted the IRA to an “inherited IRA,” , this penalty would not apply.
Roth IRA
What Is A Qualified Charitable Distribution
Generally, a qualified charitable distribution is an otherwise taxable distribution from an IRA owned by an individual who is age 70½ or over that is paid directly from the IRA to a qualified charity. See Publication 590-B, Distributions from Individual Retirement Arrangements for additional information.
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What Happens When You Inherit A 401
When the account owner opened their 401, they named their beneficiaries — the person or people they’d like to receive their retirement funds if they died — on a 401 beneficiary designation form. The primary beneficiary, often the spouse if the account owner was married, will get the money if they are still alive and want to claim it. But if they have passed away or do not want the funds, the money goes to the contingent beneficiaries.
As the beneficiary, you must decide how you’d like to receive your inherited 401 funds. The options available depend on several factors, including:
- Your relationship to the account owner
- The account owner’s age at death
- When the account owner died
- Your age in relation to the account owner’s at death
- Your health
- What the 401 plan allows
Option : Keep Your Savings With Your Previous Employers Plan
If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.
Some things to think about if youre considering keeping your money in your previous employers plan:
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Rolling Over Your 401
Theres a right way and wrong way to move a 401 to an IRA, and your surviving spouse will want to do it the right way. Cashing out the fund is the wrong way, since it could result in taxes of up to one-third of your balance. Shell first need to set up an IRA account, preferably shopping around to find the one with the lowest fees. She can then go to the plan sponsor your employer and ask for a direct rollover. This will ensure that the money is moved from the old account to the new one, rather than writing a check for the account balance.
She needs to make an important decision when choosing an IRA provider. There are some brokers who manage everything for clients, creating a diversified profile that needs no hands-on management. However, if shes good with investments, she may instead choose to go with a broker that allows her to actively manage her portfolio on a regular basis. Whichever choice she makes, shell need to regularly check in on the plans performance to ensure it continues to grow.
Can You Open A Joint 401 As A Married Couple
While it is possible for married couples to open a joint bank account, you cannot open a joint 401 even if you are a couple. IRS rules require that retirement accounts such as 401s and IRAs be individually-owned, and you cannot co-own your spouseâs 401 account or move funds between the retirement accounts.
Spouses suffer no harm in maintaining their own retirement account. The two 401s can grow in tandem by choosing investments that meet their financial goals. The goal of the spouses should be to create a diversified portfolio comprising a mix of short-term and long-term assets.
However, it is possible to have joint taxable investment accounts as a couple. For example, you can open a joint brokerage account as a married couple to buy and sell securities such as stocks, bonds, and ETFs. A brokerage account has various pros such as no income limits, tax benefits, and no funding restrictions, which make it more flexible than a 401 account. On the downside, brokerage accounts may have higher fees and higher risks than a traditional retirement account.
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Can I Transfer My 401 To My Spouse
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For most assets, we are free to transfer ownership interests to our spouses whenever we want. That is not the case with retirement plans and IRAs.
Q.Hi Dan, I was hoping you could help answer a question for me. If I have a 401k account through my former employer , how could I transfer that to my spouse? Could I roll over to an IRA and put under his name or split into two? Would there be a penalty for that? Do you know what the penalty or tax is for cashing out of the 401k at my age? Thank you! – SMC
A. SMC, there is no penalty for cashing out your 401 at your age. If you made no after-tax contributions, any amounts withdrawn from a traditional 401 are taxable as “ordinary income” to you. The rate that applies depends on all the entries on your tax return and the “taxable income” that results.
To transfer the assets to your spouse, you have two choices. First, you can withdraw the funds and give the net after tax amount to him. Otherwise, he can only get the assets in his name if he is the named beneficiary when you die.
When he inherits your IRA, the transfer to his control is not a taxable event. He will pay taxes on any distributions he chooses to take or must take via required distributions.
I was disabled in the early 80s due to a flying accident in Massachusetts and have been on SS disability ever since.
Will I Have To Pay The 10% Additional Tax On Early Distributions If I Am 47 Years Old And Ordered By A Divorce Court To Take Money Out Of My Traditional Ira To Pay My Former Spouse
Yes. Unless you qualify for an exception, you must still pay the 10% additional tax for taking an early distribution from your traditional IRA even if you take it to satisfy a divorce court order ). The 10% additional tax is charged on the early distribution amount you must include in your income and is in addition to any regular income tax from including this amount in income. Unlike distributions made to a former spouse from a qualified retirement plan under a Qualified Domestic Relations Order, there is no comparable exception.
The only divorce-related exception for IRAs is if you transfer your interest in the IRA to a spouse or former spouse, and the transfer is under a divorce or separation instrument ). However, the transfer must be done by:
- changing the name on the IRA from your name to that of your former spouse , or
- a trustee-to-trustee transfer from your IRA to one established by your former spouse. Note: an indirect rollover doesn’t qualify as a transfer to your former spouse even if the distributed amount is deposited into your former spouse’s IRA within 60-days.
See Retirement Topics – Divorce
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Roll The Account Over Into His Or Her Own Retirement Account
Some retirement plans require that a deceased employees account be distributed in a lump sum. In order to avert an immediate tax obligation, a surviving spouse could roll over the account into his or her own IRA or other retirement plan. Required minimum distributions would begin when the surviving spouse turns 70 ½.
Background Of The One
Under the basic rollover rule, you don’t have to include in your gross income any amount distributed to you from an IRA if you deposit the amount into another eligible plan within 60 days ) also see FAQs: Waivers of the 60-Day Rollover Requirement). Internal Revenue Code Section 408 limits taxpayers to one IRA-to-IRA rollover in any 12-month period. Proposed Treasury Regulation Section 1.408-4, published in 1981, and IRS Publication 590-A, Contributions to Individual Retirement Arrangements interpreted this limitation as applying on an IRA-by-IRA basis, meaning a rollover from one IRA to another would not affect a rollover involving other IRAs of the same individual. However, the Tax Court held in 2014 that you can’t make a non-taxable rollover from one IRA to another if you have already made a rollover from any of your IRAs in the preceding 1-year period .
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Rollovers To Simple Iras
Can my client roll over money to her SIMPLE IRA.
ERISA consultants at the Retirement Learning Center Resource Desk regularly receive calls from financial advisors on a broad array of technical topics related to IRAs, qualified retirement plans and other types of retirement savings and income plans, including nonqualified plans, stock options, and Social Security and Medicare. We bring Case of the Week to you to highlight the most relevant topics affecting your business.
A recent call with a financial advisor from California is representative of a common inquiry related to savings incentive match plans for employees IRA rollovers.
Highlights of the Discussion
As of 2016, , SIMPLE IRAs can receive rollovers from traditional IRAs and simplified employee pension IRAs, as well as from eligible employer-sponsored retirement plans, such as 401, 403, or governmental 457 plans, as long as it has been two years since the individual first participated in the SIMPLE IRA plan. So, if your client has owned her SIMPLE IRA for two years, then she can roll over money into it from another eligible plan. SIMPLE IRAs still may not accept rollovers from Roth IRAs or designated Roth accounts within 401 plans.
SIMPLE IRA assets may never be rolled over to a designated Roth account in a 401 plan and vice versa.
For a handy reminder of what retirement assets can roll where and when, please link to the IRSs Rollover Chart.
