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MOVE THE MONEY
As part of their employment package, most people have some sort of IRA or 401(k). As they move from employer to employer these accounts usually stay with the old employer. You don’t get the most benefit from them because you aren’t there to make investment decisions.
You can roll these accounts over into a new IRA which you can then use to invest. There are two ways to do this. One is called a “rollover” and the other is called a “direct (or trustee-to-trustee) transfer.” Of these two ways to move plan money, the direct transfer method is usually best.
In a rollover, you receive your plan assets via a check made out to your name. To avoid any taxation or penalty, you have 60 days from the day you receive that check to get those proceeds to an IRA. That check, though, will only be for 80% of the account balance. That’s because, by law, the plan must withhold 20% of your account balance to pay for any possible income taxes on the amount that’s distributed through the check the plan issues to you.
To complete a 100% rollover of your 401(k) money, you must come up with the missing 20% from other assets, probably by removing money from your bank account. You would then add that 20% to the 80% you got from the plan, and deposit those proceeds into an IRA within 60 days. If you fail to add those extra funds, then at the end of your tax year the IRS will call the missing 20% a taxable distribution – even though you never actually received those funds. As a result you must declare that 20% as income. You will also pay a 10% early withdrawal penalty on that sum if you’re younger than 59 ½. If you pay the 20% from other savings, the government will refund the 20% it withheld when you file your income tax return provided you otherwise owe no more income taxes for the year.
A direct transfer results in the money being transferred directly from the 401(k) plan custodian to your desired IRA custodian. You never see the cash. Both these custodians do this all the time and are familiar with the paperwork. All you need to do is inform each of what you are doing. They will give you instructions – and probably paperwork to sign – and they will take it from there. So long as any check that is issued cannot be cashed by you, there should be no problems.
NOTE: If you wish to keep those funds eligible for a future transfer to a new employer’s 401(k) plan, you cannot mix them with any other funds. If you don’t wish to plan for future transfers, you can assemble all your old 401(k) funds into one self directed investment IRA.
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