Qualifying Event for 401k Asset Rollovers to an IRA
Most 401k plans restrict withdrawals to very specific events. While each plan has it's own parameters, certain rules are true for all plans. In addition, there are several factors to consider as you determine when to rollover your 401k plan to an IRA.
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Types of Qualifying Events
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Generally, a participant can only withdraw funds from a 401k for very specific reasons: a separation of service, plan closure with no replacement, achievement of age 59 1/2, financial hardship or eligibility for reservist distributions. Of these, only separation of service -- you retire, become disabled, die or otherwise leave your employer -- and plan closure are eligible for rollover into an IRA.
An individual plan may allow withdrawals for other reasons (often referred to as in-service distributions), and these may or may not have rollover options. Review your Plan Summary document and discuss your options with your human resources department if you feel you may be eligible for an in-service distribution.
Benefits
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A rollover IRA allows for complete control of your retirement savings and investment options. Most 401k plans offer a limited array of mutual fund choices, while an IRA can be set up and invested as you see fit. You can continue to contribute to an IRA once it is established, not only through new contributions but also via additional rollovers. This allows you to consolidate your savings for simpler accounting.
A rollover allows for complete separation from a prior employer, something many people find helpful if termination of employment was uncomfortable or hostile.
A rollover is also eligible for conversion to a Roth IRA, either all at once or over time. Full or partial conversion to a Roth diversifies future tax obligations and withdrawal requirements, a good strategy for many people.
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Drawbacks
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While an IRA rollover confers a measure of independence, it also adds a large measure of responsibility. The IRA investor must take an active role in choosing investments and ensuring the legality of all transactions. 401k plans must have trustees -- persons or corporations who hold fiduciary responsibility for all plan assets. These experts monitor investment options for performance and plan activity to ensure legality.
401k plans may also invest in R (retirement) or I (investment) class shares, which typically have lower operating costs than the A, B and C shares available to individuals.
Procedure and Time Frame
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If you choose to rollover your 401k to an IRA, begin by establishing an IRA account (if you do not already have one). Your IRA custodian will provide instructions for the transfer of assets, and may have a form to fill out that details what you plan to deposit. Your 401k sponsor will also have a form to fill out. Request a trustee-to-trustee transfer of assets or a rollover. Make sure to request that the check or assets are sent directly to your IRA custodian.
Most 401k providers take two to four weeks to complete transfer of assets. Once complete, you will receive a zero sum statement from your 401k provider and a corresponding new balance from your IRA.
In January, you will receive a Form 1099R showing the 401k distribution. Use this form to report the transfer (and Roth conversion, if applicable) to the IRS on your tax returns. In May, you will receive a Form 5498 from your IRA showing the corresponding deposit. Keep this form with your tax records.
Warning
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Retirement plan payouts that are not rolled over within 60 days will be considered distributed and subject to taxes and penalties. Work with both your 401k plan sponsor and your IRA custodian to ensure a smooth and efficient rollover.
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