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General   |   Eligibility   |   Contributions   |   Distributions (Withdrawals)   |   Taxes   |   Rollovers

IRA: Rollovers

  1. I'm leaving my job. Can I roll my employer-sponsored retirement plan into an IRA? How does that work?
  2. Can I roll a traditional IRA consisting of my pre-tax contributions and earnings into my employer-sponsored retirement plan?
  3. Can I roll my 401(k) into a Roth IRA?
  4. How many times can I roll over funds between IRAs?
  5. What is a conduit IRA and when do I need one?
  6. What are the new rollover rules and how do they affect IRAs?

1. I'm leaving my job. Can I roll my employer-sponsored retirement plan into an IRA? How does that work?

You may roll money in a 401(k), 403(b) or governmental 457 plan into a traditional IRA when you leave your job. You may choose one of two methods to do this:

  1. A trustee-to-trustee transfer. When your former employer asks what you would like to do with your retirement money, ask that it be transferred directly to your IRA custodian. Give your employer the account name and number. Your employer will give you a check made out to the IRA custodian, which you should hand over right away. The money moves directly from one tax-deferred account to the other, and there are no tax consequences.
  2. A rollover that you do yourself. With this strategy, which can be tricky, you take a lump-sum withdrawal in a check made out to you and deposit the amount in your IRA within 60 days. But under IRS rules, your former employer is required to automatically withhold 20 percent of your balance for taxes. To roll over the entire balance, you must come up with an amount equal to the 20 percent withholding to include with your deposit. If you don't, that amount will be considered a taxable distribution. (You will also owe a 10 percent early withdrawal penalty if you left your employer before the year in which you turn age 55.) If you miss the 60-day deadline the entire amount will be considered a taxable distribution.

By the way, you may not be required to do a rollover. If you have at least $5,000 in your account, you should be able to leave it where it is. However, if your balance is less than $5,000 and more than $1,000, your employer may decide to automatically roll it into an IRA on your behalf. If this occurs, there are no tax consequences because the money moves from one tax-deferred account to another.

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2. Can I roll a traditional IRA consisting of my pre-tax contributions and earnings into my employer-sponsored retirement plan?

Yes you may, providing the plan accepts rollovers.

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3. Can I roll my 401(k) into a Roth IRA?

No, not directly. What you can do is roll the 401(k) into a traditional IRA, and then, if you meet the IRS' income limits, convert the traditional IRA to a Roth IRA. You might want to check with a financial advisor on the tax implications of such a strategy.

Remember, you may only take money out of your 401(k) plan once you turn 59½, or if you leave your job.

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4. How many times can I roll over funds between IRAs?

You can do as many "trustee-to-trustee" transfers as you would like. (This means having the money or property made payable to the receiving trustee, custodian or issuer.) You may only do one rollover per year, per IRA. (A rollover is when the money or property is paid to you and you then deposit it in another account yourself within 60 days.)

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5. What is a conduit IRA and when do I need one?

"Conduit IRA" is a term sometimes used to describe a traditional IRA that is used to hold the money from an employer-sponsored retirement plan such as a 401(k) or 403(b), until it can be rolled into a new employer's plan. Under old tax rules, it was important not to mix this money with new individual contributions to the IRA, so it was a good idea to have a separate account. However, new rules in the tax bill that became effective in 2002 essentially eliminate the need for conduit IRAs. The law allows workers to roll money from employer plans (including governmental 457 plans) to an IRA and roll deductible IRA contributions and earnings into an employer-sponsored plan.

The 2001 tax bill is set to expire at the end of 2010, and these rollover provisions will be lost. However, retirement industry lobbyists predict that the rollover rules stand a good chance of being extended or made permanent, mostly because they don't affect tax revenues.

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6. What are the new rollover rules and how do they affect IRAs?

Worried that many Americans are cashing out of their retirement plans when they change jobs, Congress passed laws in 2001 making it easier for workers to take their money with them but keep it growing in tax-qualified retirement savings programs. In other words, they made your retirement savings more portable.

Under the new rules, which took effect Jan. 1, 2002, state and local government workers with 457 deferred comp plans will be able to roll this money into a traditional IRA when they leave their jobs -- something they were not allowed to do previously. Workers participating in 401(k) and 403(b) plans continue to be able to roll money from these accounts into an IRA. What's new for them is the ability to roll money among different plan types; for example, a worker who rolls a 401(k) into an IRA can then roll that money into a 403(b) at a new employer, provided the new employer's plan accepts rollovers. Finally, pretax contributions made directly to an IRA can be moved into an employer's retirement plan such as a 401(k), 403(b) or governmental 457, providing the plan accepts rollovers, if you want to consolidate your retirement money.

The new rules also allow after-tax contributions to an employer-sponsored plan or an IRA to be rolled over, provided the receiving account permits after-tax contributions.

Unfortunately, the portability rules may only be available for a limited time. Unless the law permitting these rollovers is extended, it will expire in 2010. Retirement industry lobbyists expect the rollover rules to be made permanent, however.