401k Rollover Rules

Frequently Asked Questions

1. QUESTION:
   401k rollover to Roth IRA for married couple both age 60, Does it make financial sense?
   With the new rule in effect as of March 2008 allowing a direct 401k rollover to Roth IRA, could you shed some light on this scenario: A couple, both over 60 files jointly and will be earning less income when retired. Currently both are working and earn 100,000. When retired their income will be 46,000. They have 300,000 combined in their 401k and would like to know if it makes financial sense to rollover to a Roth Ira. Thank you for your help.

   • ANSWER:
     The short answer is – it depends on the tax rate. Let’s take 3 scenarios: Tax rates stay the same, your taxes are lower in retirement and finally your taxes are higher in retirement.

     Assumptions:
     1) You pay for the conversion out-of-pocket (as opposed to funding it with monies in the 401(k)).
     2) If you do not convert, you invest what you would have paid in conversion costs in a taxable account.

     Currently, your marginal tax rate is 28% and in retirement it will be 25%. Paying 28% now, when you can pay 25% later makes a ROTH less attractive. If the government decides to raise taxes, when you retire, a ROTH makes more sense.

     Now, there are other subtle differences between the types of accounts, like required minimum distribtions, that effect estate planning. This example does not consider this.

     You can make a case either way if the government will raise or lower taxes in the future. Since we do not know with certainty, I suggest another option. Rollover 1/2 of your account. Keep some in a pre-tax account (401k) and some in a post tax account (ROTH).

     This is a different kind of diversification – tax diversification. See the source that I listed from vanguard.

2. QUESTION:
   does the unvested portion of my 401k rollover with a company buyout?
   Does the company take the money it matched me in my 401k, when it sells to another company? Ive been with the company 14 months, there 401k is fully vested after 6 years if i didnt quit or get fired. Is this matter handled on a company to company basis, or is there a standard rule for unvested cash with company buyouts?

   • ANSWER:
     Your company’s 401k plan is a separate entity, apart from the company itself. Whether the new company will continue the plan is a question you need to ask your HR dept (or the new company’s HR dept.). There is no requirement that they continue the old plan.

     You should also check the plan’s SPD – Summary Plan Description to see what it says.

     In any case, the money would not revert back to the company.

3. QUESTION:
   401K rollover to Rollover IRA & ROTH IRA after tax dollars?
   I have a 401K from a previous employer which contains both Pre tax dollars and After tax dollars. I would like to rollover this 401K to my Rollover IRA (pre tax dollars) and my Roth IRA (after tax dollars). I believe the rules beginning 1/1/2008 allow this rollover to take place as a normal rollover, but I’m getting conflicting information from my source & target broker. Can anyone add any insight or clarify my understanding?
   THANKS
   Thanks Elizabeth… by normal rollover I guess I meant Direct Rollover.

   In your example I would end up with 4 accounts (2 pre tax & 2 “after tax”/Roth account)? couldn’t I then “rollover” 2 of the accounts (1 pre, 1 roth) into the other accounts (1 pre, 1 roth)?
   Sorry, I just spent time with my source and target financial institutions and I’m amazed but I’ve gotten various responses when trying to get this accomplished. I BELIEVE it can be done, but would like some “official” IRA document I can send to these 2 brokers.
   THANKS Again

   • ANSWER:
     what is that old saying ” you can’t get there from here” you can do what you want but it will take two movements to get it done == transfer the accounts into new accounts with the receiver and once he receives them than he can combine them!!!

4. QUESTION:
   When do the 15% capital gains rate, marginal rate reductions, and the IRA to employer rollover rules expire?
   1. The marginal rates for the various tax brackets were lowered temporarily lowered several years ago, for example, the 28% bracket became the 25% rate. When does this expire and the rates return to normal?
   2. At one time, long term capital gains were taxed at a 20% rate. This was temporarily lowered to 15%. When does this expire and the rate return to 20%?
   3. At one time, you could roll over money from an employer plan (401k, etc.) to an IRA, but not from an IRA to an employer plan. Now, you can. Is this change permanent? If not, when does it expire?

   • ANSWER:
     1. Originally 2005.Now 2010.
     2. Originally 2008, now 2010.
     3. I don’t know.

     All dates are moving targets. The government actually likes to wait until the last minute to “extend” or “patch” legislation as they can use old income projections to balance the budget. When they lower taxes, they are supposed to a) reduce spending or b) increase taxes on someone else to balance the budget. By waiting until it’s politically expedient to do so, they can skirt the paygo rules.

5. QUESTION:
   Can I transfer my Rollover IRA account to a different broker?
   Recently, I had to transfer my 401K account to a Rollover IRA account at my wife’s employer – an investment bank (IB). According to the IB rules my wife or any immediate family member cannot have any trading or IRA accounts with any other IB or brokerage. Unfortunately, the IB charges extremely high commission on stock transactions. So, I am looking for a way to transfer my money out of my wife’s IB and into a brokerage like Ameritrade. Does anyone know if there is a legal way to do that without getting in trouble with the employer?

   • ANSWER:
     Yes, employees of securities firms generally have to have all accounts under their control (yours is assumed to be) at their own firm. Some firms allow outside accounts with duplicate statements going to them, but they don’t have to. The reason for all this is to scrutinize all activity for inappropriate insider trading and the like.

6. QUESTION:
   Can you withdraw IRA funds early to pay student loan debt off?
   If I wanted to take money out of an IRA that was a rollover from a previous 401k to pay off student debt of my wife of 11 years in the amount of K, can I consider this an exception to the 10% additional tax rule? Thanks

   • ANSWER:

7. QUESTION:
   Borrowing from a roth ira that was converted from a rollover ira?
   I’ll try to keep this as short and simple as I can.

   My husband contributed to a 401k plan at a previous job. He got partial match on contributions. When he left the company, they put it into a rollover ira. When we got married, I took the money from the rollover ira and converted it to a roth. We have not paid taxes on it yet (but will as of April). We are now looking at buying our first home. The conversion was only about a year ago or so, so we are outside of the 5 year rule.

   My questions are these:
   - We are allowed to take contributions out at any point tax free. Does this mean that the money he put in originally while at his previous company is tax free withdrawal, or is it the amount we converted? Is the 5 year rule applied to this?
   - If we take money out towards the down payment on our new home, are we a) paying taxes on the money we take out, and/or b) paying a 10% penalty [since it has not been 5 years]?
   - I’ve read that you can take the money out as long as it is replaced within 60 days. I’ve also read that you can borrow against it as long as the money is replaced by the time taxes come around. What are the rules on this? Do either of these even apply to a roth, or only to traditional?
   - If we take money out at this point, and do not pay all of it back within the 60 days, do we pay taxes + penalty on all remaining outstanding balance? Is our “earned” portion put back in first, or the original contributions? If we have paid back at least the amount of the “earned” portion by the 60 days, how will that effect our taxes and/or will it incur a penalty?

   Thanks.

   Add: I know it’s bad to borrow against an ira because of the long term effect it can have on how much you have at retirement. We will be repaying any money taken out within 4 months. We are looking into this mostly because we don’t want to miss out on the tax credit that is available until the end of April/June.
   When I said “borrow”, I meant “withdrawal”. I only meant that it would be paid back when I said borrow. Sorry for the confusion!

   • ANSWER:

8. QUESTION:
   Should I roll over my ESOP shares from my previous employer to a Roth IRA or my new employer’s 401k plan?
   I have ESOP shares that, per the rules of the plan and maybe the law, must be distributed this year. I can do a direct rollover to a Roth IRA or a qualified employer’s plan. In this case, my new employer provides a 401k. So I have 2 options to avoid the 20% witholding penalty and also 10% to 15% early withdrawl tax penalty. I am thinking to go to the 401k so I can manage only one account, and the rate of return seems to be better right now than Roth IRA’s. Then again, having the Roth IRA will diversify my portfolio, and, will it accrue have a higher rate of return? Note that I am almost able to afford the max contribution of ,500; will probably be able to max out next year or so if I get a raise, and I am rolling over my balance from the previous employer’s 401k.

   What do you think?

   • ANSWER:

9. QUESTION:
   Employer removing too much from 401k? Who owns the appreciation on the vesting portion that is forfeited?
   The company I recently left has a four year vesting schedule for their matching. Since I left in year three, the company is taking back 25% of their contributions (and a bit more). I backed into their calculations and figured out that they did not calculate the 25% based on what they contributed but based on what they contributed plus that appreciation. To illustrate, here are some example numbers:
   Company Contributions:
   ,000        Year 1 company matching contribution
   ,000        Year 2 company matching contribution

   ,000        total company matching contribution

   One would figure that with a 75% vesting, the company would deduct 0 (25% of ,000) that they contributed and I would rollover ,500 to my IRA.

   However, the company deducted 0 and only contributed ,400.

   I figured out the issue lies in the fact that the value of the original contribution rose from ,000 to ,400 via mutual fund stock appreciations. The company multiplied 25% times the ,400 to reach the 0. This does not seem right to me. The original promise was a defined contribution of ,500 given the vesting. However the company, only contributed ,400.

   Anyway, I guess this begs the question – Who owns the appreciation on the matching contribution that is not vested?

   It appears to me that company owes the amount promised at the time of contribution (,500) not a lesser amount because of appreciation (,400). Is ,500 not the definition of “defined contribution.”

   Anyway, has anyone run into this before?
   Am I thinking about this the wrong way?
   Is there an IRS ruling?

   Thanks

   PS I know this is not a large amount but I do find it disturbing that such trickery is played. It seems that investment prowess (or luck) is my returns, not a way to lower their original promise of contribution. I doubt if I lost money that I would have to pay less back.
   Actually I worked three years plus a few months, so 75% is the correct vesting percentage.

   • ANSWER:
     They aren’t going to do anything illegal – 401k plans are audited by the government

     maybe there is some kind of penalty deduction also

     you are arguing about 0???? give it up already

10. QUESTION:
    Retirement Distribution Confusion for 2010 Federal Tax?
    1) Let’s say that you withdrew 0 from your 401K and rolled it over to a Rollover IRA and then converted of 0 into Roth IRA. It appears like in the eyes of IRS, they consider both transactions as distributions (401K -> Rollover IRA, and Rollover IRA -> Roth IRA). So it turns out under IRS rule, my total distribution is 0 (0 + ) even though only is taxable as was converted from Rollover to Roth IRA. Is this correct?

    2) Another confusion is, you can get Retirement Savings Contribution Credit, but Turbo Tax asks you if you received any distribution from Retirement Plans in 2010. I think, I have to answer with 0 even though my before tax money is and my after tax money (which went into Roth IRA) is … So the actual amount is only 0, but I think I have to say my total distribution is 0 even though it doesn’t make sense. Am I correct?

    Please help. This tax is a pain in where you know what.
    Yes, the rollover took place WITHIN 60 DAYS so it would mean that amount is NOT distribution?

    • ANSWER:
      it is only a pain since you made it so
      first of all if you rolled over either a 401(K) or and IRA into another within 60 days it is not a distribution

      then if you actually took a distribution of 0 that would be taxable
      if you converted to the Roth, you would pay income tax on the , and early withdrawal penalty as well

11. QUESTION:
    Can I contribute to a Roth IRA if I am self-employed and have a NOL?
    I am self-employed and had a net operating loss and carry back on my taxes last year. This year, I expect to be in the same situation – I have brought in some income but my expenses out weight my income.

    Since I am in my 30s and have next to no retirement funds, I have done some research and really like the Roth IRA. The contribution rules state that I must have “earned income” in order to contribute and in some places I read they also talk about my adjusted gross income (AGI). I will have no income to report on 1040 line 7 and line 12 Schedule C I expect to be a negative number (Net Loss).

    Does this mean I cannot contribute to a Roth IRA? I have small hopes that the number I really should be looking at is line 1 of schedule C as my earned income instead of line 31 of Schedule C.

    If I cannot contribute to a Roth IRA, what is the next best option to save for my retirement when I have a net loss?

    More information that may or may not help: I am single but being supported by a same-sex partner while I get my business going. Due to same-sex discrimination I cannot use my partner’s income to contribute like DMOA spouses can. I have an old 401k (only 10k) under my old employer that I’ve been told I need to rollover at some point. I’ve also looked into a SEP-IRA but it requires net profit and even then I can only contribute 18.6% of the net profit (I am many years from being able to put much money into one of these!). Due to my medical issues, our plan is for my personal business to just be our supplemental income so I will only work part-time in the long term. This might mean I will probably be limited for retirement contributions even if I reach my current business goals.

    • ANSWER:
      It’s true. You need “earned income” (wages, NET self-employment income, etc.), or surprisingly, alimony, to fund a retirement plan like a Roth IRA, SEP-IRA, or Traditional IRA. Your regular and Roth IRA contribution limits are 100% of earned income or ,000 (,000 age 50 and older), whichever is less. SEP-IRA limits are 20% of (net self employment income less 1/2 of self- employment tax), or ,000, whichever is less. Other retirement-planning investment options could include:

      1. Annuity (Variable or Fixed). Much like a non-deductible traditional IRA, earnings, if any, grow tax-deferred until withdrawn, and a 10% IRS early-withdrawal penalty may apply to earnings withdrawn prior to age 59 1/2. No contribution limits except those that may be imposed by the insurance company.

      2. Mutual Funds and/or Brokerage Account. If you’d like to avoid probate at your death, you can title these as Transfer on Death accounts with one or multiple beneficiaries.

      Find a strategy you can embrace and invest systematically, monthly, for example, regardless of all the “noise” you’re bound to hear in the media.

      Hope that helps.

      On behalf of all of your responders, who take the time and effort to help questioners in this free Yahoo! community, THANK YOU in advance for taking the time to choose your “Best” Answer. We really appreciate it.

      DISCLAIMER: While the information in this response was obtained from sources believed to be reliable, its accuracy and completeness cannot be guaranteed. The opinion voiced in this answer is for general information only and it shall not be construed as tax, legal, or investment advice for any individual. Questioners are urged to consult with their professional advisers before making any decisions regarding their finances

      Bradley Mann, EA, CFP®, BCE
      Enrolled Agent | Admitted to Practice before the IRS
      Certified Financial Planner™ Practitioner

12. QUESTION:
    Should I convert my traditional IRA to a ROTH before end of 2010?
    I recently changed jobs and rolled my 401K over to a traditional IRA. With the 2010 rule that allows individuals to rollover a traditional to a Roth and split taxes over 2011 and 2012, I want to take advantage if it makes sense. I have about K in the traditional IRA. This may bump me into a higher tax bracket, but I’m only 33 years old right now so the benefits of being able to grow the money tax-free will possibly outweigh any tax hit I take now. Any advice?

    Also, when it says that you can split taxes over 2011 and 2012, does that mean that I will claim 50% of the converted amount on my upcoming taxes that I file in 2011 for 2010 income? Or does it mean that I won’t have to add the converted amount as income until I do my taxes for 2011 income? Thanks for any input.
    Also, is it possible to rollover a portion of the IRA in 2011? Meaning can I just go ahead and rollover half of it next year in 2011 and then half of it in 2012? There are obviously lots of things that will factor in from a tax standpoint that will impact my decision (mortgage interest payments, etc). I plan to talk to a tax accountant/adviser, but I just wanted some quick feedback on the IRA rules since it’s 12/30. Thanks!

    • ANSWER:
      The question is do you want to pay taxes on this retirement now or when you start taking the money out ? Traditional IRA you pay taxes when you take out in the future. Ross is you pay now so at retirement there is no tax. Ross also has other benefits. Talk to a tax person for the right info.