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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:

TMF also has a series of articles specifically on Roth IRAs. You can jump to the head article from this link:

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:

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:

These TMF articles discuss common misconceptions about IRAs:

David Jacobs
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