Can You Roll Over a 401(k) or a 403(b)?
Employee-sponsored retirement plans such as 401k and 403b allow workers to defer a portion of their compensation -- and the taxes on that compensation -- to accumulate for retirement. Contributions grow tax deferred, and withdrawals in retirement are taxed at income tax rates. The IRS allows you to transfer a 401k or 403b balance into an individual retirement arrangement (IRA) tax free, under certain circumstances.
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Execution
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Generally, the IRS allows you to execute a rollover from a 401k or a 403b into an IRA or Roth IRA. You can do this by taking the money directly and transferring it to the new plan yourself, but this can be dangerous: First, the 401k plan sponsor will withhold 20 percent of the balance to pay taxes with. But you must transfer the entire balance within 60 days -- including the 20 percent withheld that you didn't see -- or the IRS will deem the entire transfer to be a taxable distribution. You will then be charged income tax on the entire transfer, plus an additional 10 percent penalty if you are younger than age 59 and a half.
To avoid this situation, have the employer plan move the money directly to the IRA custodian in a "trustee-to-trustee" transfer.
Eligibility
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You can roll money into an IRA from another traditional IRA, a 401k, a 403b or any other employer plan qualified under the Employee Retirement Income Security Act, from a Section 457 deferred compensation plan. However, you can generally execute only one rollover from an IRA account per year.
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Restrictions
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You cannot rollover a required minimum distribution, a hardship distribution, a distribution of a series of substantially equal payments over a period of more than 10 years, or over your lifetime or the joint lifetimes of you and your beneficiary. You also cannot roll over dividends on employer stock or the cost of life insurance coverage.
Note that some plan sponsors do not allow "in-service distributions." You may have to wait until you are no longer employed before your employer allows you to conduct the rollover.
Rollovers to Roth IRAs
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Roth IRA contributions are made with after-tax dollars. But growth in IRA accounts is tax free, income is tax free and there are no required minimum distributions in retirement. This may allow your heirs to inherit a much larger after-tax sum than they could with a traditional IRA or 401k. If you believe your income tax bracket will be higher now than in retirement, you may wish to consider rolling over into a Roth. You will need to pay income taxes on the rollover amount.
Considerations
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You may wish to roll over to an IRA if you want more investment choices or you want to have better control over your assets. You may also wish to roll over to an IRA if you have large amounts of vested company stock and your 401k plan does not allow you to sell that stock and diversify into other assets. If you are still working for the company, and your employer allows 401k loans, you may wish to keep your assets in a 401k plan if you anticipate the need to borrow money from your 401k. The IRA has no loan provision.
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