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I left an environmental consulting company in CA and am now working as a teacher in NYC.

I need to do something with my 401k (which is now pretty small after the last year or so). I can't roll over my 401k into any retirement options for my new job so I need to open a personal account.

What are the different tax implications of: a direct rollover into a new personal retirement account versus the transfer of the funds to an personal IRA account?

And are there any advantages to converting the funds into a Roth IRA?
I am 31 now, still awhile until I am buying a Winnebago.

I pretty much want to leave the funds (which are in a family of mutual funds) alone, but be able to move them around within the fund family later.

Any input would be appreciated.
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cabreck writes (in part):

What are the different tax implications of: a direct rollover into a new personal retirement account versus the transfer of the funds to an personal IRA account?

And are there any advantages to converting the funds into a Roth IRA?
I am 31 now, still awhile until I am buying a Winnebago.


I reply:

I think you're asking the difference, for tax purposes, between funding your soon-to-be-established traditional IRA with a direct rollover and funding it some other way. A direct rollover is almost certainly preferable. If you withdraw the money yourself from your former employer's retirement plan, they will almost certainly withhold 20% for taxes. You will then be responsible for getting that 20% into an IRA within 60 days from your other funds; if you don't, it will be deemed a premature distribution and you will pay taxes, a 10% penalty, and New York state taxes (and possibly state penalties as well). If you do a custodian-to-custodian "direct rollover," you won't have to worry about any of this; the money will simply disappear from one account and reappear in the other.

Once the funds are in a traditional IRA (and not before), you may elect to convert the traditional IRA (or any part of it) into a Roth IRA. You will have recognize as income the amount of the conversion in the year of the conversion. The strongest contra-indicator to doing this is when you would not be able to afford the additional taxes from non-retirement accounts. The strongest indicator that converting to a Roth is a good idea is if you anticipate a higher marginal tax rate in retirement than you have now. The only way to be sure, of course, is to make some assumptions (or several sets of assumptions) and run the numbers. --Bob
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What are the different tax implications of: a direct rollover into a new personal retirement account versus the transfer of the funds to an personal IRA account?

Volumes have been written on the relative advantages of 401(k)/403(b) accounts and IRAs. When all the dust settles, most informed people agree 401(k)/403(b) accounts are a great way to ACCUMULATE retirement assets, and IRA accounts are a great way to MANAGE retirement assets. Consequently, what you probably prefer to do is to move your 401(k) assets into an IRA.

The easiest way to move your funds is to select an IRA custodian, and then arrange for the custodian to move the funds for you. The new custodian will send you forms to complete and return. Once the new custodian receives your completed forms, the transfer process takes two to four weeks, although sometimes it takes a little longer.

When you transfer your funds, make sure you get ALL your funds in the transfer. Many years ago I arranged for a new IRA custodian to move funds from an old IRA custodian and close the old account. As luck would have it, the tranfer order hit the old custodian after an ex dividend date, but before the old custodian credited the dividends to my account. I spend months figuring out why I had a small balance in my old IRA account and getting that small balance moved to the new IRA account.

You're not allowed to move funds directly from a 401(k)/403(b) to a Roth IRA. The procedure there is to move your funds from a 401(k)/403(b) to a Traditional IRA, and then convert the Traditional IRA to a Roth IRA. Your new IRA custodian will help you with the conversion process -- still more forms to complete and return. However, the conversion process has tax consquences, so make sure you understand the consequences before you do the conversion.

TMF has an informative series of articles on IRAs. You can jump to the head article from this link:
http://www.fool.com/money/allaboutiras/allaboutiras.htm?REF=PRMPIN

TMF also has a series of articles specifically on Roth IRAs. You can jump to the head article from this link:
http://www.fool.com/taxes/2000/taxes000114.htm

The IRA rulebook is IRS Pub 590, Individual Retirement Arrangements. It's a little dense, but as far as IRS publications go, it's relatively readable. You can download a copy from this website:
http://www.irs.gov/pub/irs-pdf/p590.pdf
http://www.irs.gov/pub/irs-pdf/p590supp.pdf

This TMF article discusses recent changes to the tax code affecting IRA accounts and 401(k)/403(b) plans, including the revised contribution limits and the new catch-up rules:
http://www.fool.com/taxes/2001/taxes010622.htm

These TMF articles discuss common misconceptions about IRAs:
http://www.fool.com/retirement/retireeport/2001/retireeport011022.htm
http://www.fool.com/school/taxes/1999/taxes991203.htm

David Jacobs
TMFDj111
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I'm not sure I understand how you are defining new personal retirement account and a personal IRA account. For starters, may I suggest you visit the Fool retirement area at http://www.fool.com/retirement.htm?source=PRMPIN . The following link will discuss tax issues associated with 401k's and IRA.

http://www.fool.com/taxes/taxcenter/topics/retirement.htm
Look about half way down the page for these links.

· New Job, Old 401(k)?
· IRA Rollovers vs. Transfers - Rollovers
· IRA Rollovers vs. Transfers - Transfers
· IRA Rollovers vs. Transfers - The Rules

The general rules however are that pre-tax funds from a 401k must be rolled over into a traditional IRA, often called a conduit IRA or rollover IRA, or the funds will be taxed as ordinary income and in addition will incur a penalty if you are younger than 59.5 years. If the funds are distributed to you directly you have 60 days to put them into an IRA to avoid the penalty and taxes. Generally, however, taxes will be withheld from the distribution so you will have to make up the difference or be taxed on the amount of the withholding.
A traditional IRA can be converted to a Roth IRA with the advantage being that the gains from the IRA will not be taxed when you withdraw them after age 59.5. The disadvantage is that you will have to pay taxes now on the funds converted.

Hope this helps.
Bob
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If you are happy with the mutual fund family that you are currently invested in then a mutual fund account with that company maybe a good choice. Brokers charge to buy and sell mutual funds but mutual fund companies frequently do not charge transaction fees for their own funds.

A trustee to trustee rollover is best. You never take control of the funds and therefore do not have to worry about the limits for the transfer.

When rolling over an account the sending administrator should forward dividends that are paid after the initial transfer. This resulted in a $.02 check from Fidelity fortunately with a postage paid envelope. I had considered allocating 10% to each of 10 choices to see what would happen.

If you have funds other than from the 401K to pay the taxes for a ROTH conversion then it maybe a good choice. If you have to take a distribution from the IRA to pay taxes and penalties then the conversion is likely not a good choice.

Converting from a 401K to a ROTH is a two step process. It is necessary to roll the 401K over to an regular IRA and then it can be converted to a ROTH.

Debra

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What are the different tax implications of: a direct rollover into a new personal retirement account versus the transfer of the funds to an personal IRA account?

I'm not quite sure what you think the choices are, from the way you phrased this. You have really only one (initial) destination: a traditional IRA. If you want to choose from one fund family in the future, establish the IRA with that fund family.

The only sensible way to get the funds from your 401(k) to your IRA is a direct transfer. Without a direct transfer the 401(k) is required to withhold 20%, which you either have to make up or recognize as income.

Don't panic when the 401(k) sends you a 1099-R. For reasons unknown to me, the rules require them to do this, even though they code it as a direct transfer. You'll report the 1099-R on Form 1040, line 16, with the amount rolled over on line 16a and zero on line 16b.

Good luck with the teaching.

Phil
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"I pretty much want to leave the funds (which are in a family of mutual funds) alone, but be able to move them around within the fund family later."

The only thing you can put into an IRA is cash.
When you do the transfer, the trustee of your 401k will sell the assets in the account, converting to cash. If you like the family of mutual funds you have been with, you might consider that fund family as the custodian for your new IRA. To avoid unnecessary inconvenience, you do a "direct" transfer which means the 401k custodian will make the check out to your new custodian, not to you. You begin by selecting the new custodian, which could be a broker or a mutual fund family. You tell them you have changed jobs and wish to move your 401k to them. They may assign a number for your as yet unfunded account. You tell the trustee of the 401k that you have decided to move your assets into an IRA, with XXXX as the new custodian.
Probably they send the check, payable to the mutual fund family, to you. That's fine--handled thusly you know the check was issued, the amount, and when it was issued. It is likely to be several months after you select the custodian. I left a job in November, made decisions immediately and it was April 1 when I got the check, payable to my new custodian. I thought the date appropriate.
Then you send the check to the new custodian.
This must initially go to a traditional IRA.
If you wish to preserve the right to subsequently transfer the funds to a new employer's 401k, you leave it there, and you don't add any funds other than rollover funds to it.
Once the money is in your new IRA, assuming the custodian handles the mutual funds of your choice, you can invest within the fund family as you wish, and move them around as you wish. With a supermarket like Schwab, you could select funds from many families and buy and sell individual stocks or bonds if you wish.

If you convert to a Roth, you pay taxes only on the amount converted, not on any subsequent capital gain. After 3 years of bad markets now may be a good time to do that.

I wanted to clarify the mechanics of the procedure, and to make it clear that you almost certainly will NOT be able to transfer your mutual funds intact--they will be sold (no tax consequences within the 401k) and you will reinvest the cash.
Best wishes, Chris Rosenfield
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Thanks for the replys.

I did think the rollover could just stay in the same mutual funds, but now I understand that it does not. It has to cash out first and roll into an IRA. Then I can do convert to a Roth if I wish and it makes sense. (Which I think it does, because I did not make much money this year and have a long way to go before retirement, and can afford to pay the taxes now.)

I assume it cashes out based on the current value of the fund. I actually left my job in April. I wish I would have handled it sooner, as I am sure the funds are even more down now.

It is amazing how many "plan administrators" at companies I have worked at know nothing about the process. They can barely spell 401caye.


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You do not have to cash out an IRA to move it.

Contributions to an IRA must be cash but this does not apply to rollovers.

If the receiving administrator is willing to receive the mutual funds and stock held then the funds can remain in the same mutual funds.

Your company's employees may have limited knowledge. Call the number you have for the actual plan administrator. Most administrators make it very easy to move a 401K to an IRA they control.

Debra
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