I currently maintain an IRA and a 401K. I have left my current company and am rolling my 401K into the IRA (about $2,000 for fiscal 1997). Unfortunately my new employer will not let me enroll in their 401K until the first of next year. Can I contribute into my IRA during the next six months and still claim some of it as tax deductable? How much?I have to admit, I am very unclear about what happens when you talk about 401K and IRA's together. Any basic info would be appreciated.Mark
Here is some basic information:You can contibute $2000 into your IRA for 1997 in addition to any money transferred from your 401(k). Moving money from a 401(k) account into an IRA is called a rollover and doesn't affect the deductibility of your other contributions.The fraction of this $2000 which is tax deductible depends on your income and whether or not you were covered by a retirement plan. There is a reasonably clear chart in the IRS instructions for form 1040 to help figure this out. Of course even if it's not tax deductible up front, the earnings on it are tax-deferred, making it a good idea for most people to put in the full $2000.One other important point: If you eventually want to tranfer the accumulated savings from your old employer's 401(k) into your new employer's 401(k), DO NOT mix the money with your regular IRA savings in the same account. Set up a separate IRA account (called a rollover or conduit IRA).
Kipp is dead on with the basic info regarding your 401k rollover. There is, though, one other point you need to consider. Do not have the 401k rollover money sent to you in a check made out in your name. If you do, you will find 20% of the plan proceeds will be withheld for a potential tax bill for the year on the 401k distribution. You roll the 80% you get thinking everything's just fine -- But it's not! Unless you come up with the missing 20% from other resources and add that to the 80% you got, you won't have a complete rollover. In an incomplete rollover, the IRS will say that the 20% withholding was distributed to you. You'll be taxed on that sum as if you had received it. Additionally, if you're under the age of 59 1/2, you'll be zapped with an additional penalty in the form of a 10% excise tax for a premature distribution.You can avoid all that, though. Arrange for a direct transfer of all the 401k proceeds from the plan to your new IRA. The folks wherever you will establish the IRA (i.e., mutual fund or broker or bank) know how to do this and will guide you through the necessary paperwork Your plan custodian/administrator/human resources folks should be able to help in this regard, too. With the direct transfer, no taxes will be withheld and you won't get constructive receipt of any of the money to trigger a taxation problem. It's the best way to go -- no muss, no fuss.Regards......Pixy
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