How to combine my old 401(k)s into an IRA?

Question

Hello,

I am 40. I have two 401(k) funds one with $20k+ and another one with $400 from my previous jobs. In my current job I am not contributing to 401k

Questions:

  1. Can I combine those two funds in a traditional or Roll-Over IRA ?
  2. Do I have to pay taxes on April of that money moved? If so, what percentage
  3. Is it my responsibility to send a check or an electronic transfer to my IRA account ?
  4. What about the 20% withheld tax Trustee-to-Trustee transfer?
  5. The fact I am not contributing with my current employer do I need to notify them that I am contributing to my IRA ?

Thanks for your help.

namerg

Answer

Hi namerg,

1. Can I combine those two funds in a traditional or Roll-Over IRA ?

Yes, you can contact the plan administrator for your previous employer and ask them to rollover the 401(k)s into an IRA. First, you want to set up a rollover IRA account. I set mine up at TradeKing when I did my rollover. When you contact your 401(k) plan administrators, they will ask you to fill out paperwork. Make sure you select trustee-to-trustee transfer and give them your IRA account information.

2. Do I have to pay taxes on April of that money moved? If so, what percentage.

If you rollover into a Traditional IRA and do it directly trustee-to-trustee, you will not have to pay any taxes on the money moved. If you rollover into a Roth IRA, you will have to pay taxes at your regular income tax rate for the 2013 tax year, e.g., when you do your taxes in early 2014.

3. Is it my responsibility to send a check or an electronic transfer to my IRA account ?

If you instruct them to do a direct trustee-to-trustee transfer, your 401(k) plan administrators will send the money directly to your IRA account. You do not have to do anything.

However, if you choose to take a check (not recommended), your 401(k) plan administrator will withhold 20% of your money and issue you a check for the remaining 80%. You have to deposit the check (80%), plus another 20% from your own pocket into the IRA within 60 days. If you do not deposit the full 100% prior to the 60 days deadline, any difference will be taxed and you will also have to pay a 10% early withdrawal penalty. If you deposit the full 100% within 60 days, you can reclaim the 20% withheld by your 401(k) plan administrators when you file your tax returns.

4. What about the 20% withheld tax Trustee-to-Trustee transfer?

This only happens if you elect to be the middle man and ask for a check. If you do a trustee-to-trustee transfer, there is no 20% tax withholding.

5. The fact I am not contributing with my current employer do I need to notify them that I am contributing to my IRA ?

No, you can contribute to your IRA without notifying your employer. You just have to understand the contribution and phase out limits.

I hope this helps.

Best,

Pinyo

About the Author

By , on Jan 31, 2013
The following is a question submitted by our reader. You can see all questions submitted here, and submit your question here. Please remember that our answers are opinions and should not be considered professional advice and we assume no responsibility of any kind. Please consult a financial expert as needed.

Leave Your Comment (6 Comments)

  1. namerg says:

    @Pinyo. Ohhh ok. I do have the option for the Trustee-to-Trustee in my current situation.
    I promise this is my last question. What are the odds of denying the Trustee-to-Trustee ? I should be ok, right ?

  2. namerg says:

    @Pinyo. I do understand that. But i will be screw because of the 20% and not trustee to trustee right ?

    • Pinyo says:

      @namerg – If you follow the instruction above, e.g., open an IRA with a broker, request trustee-to-trustee transfer directly to your IRA; then you should have no problem with the 20%. However, if you already made a non trustee-to-trustee transfer and you have the check, then you have to come up with the 20% to make the amount whole again in the IRA — otherwise, you will have to pay taxes and early withdrawal penalty on the missing 20%.

  3. Pinyo says:

    @Roger – Thanks for that clarification.

    @namerg – Your employer cannot offer a Traditional IRA account — you have to open an IRA account with a discount broker or an investment firm. You can contact any broker on this list: http://www.moolanomy.com/1644/.....k-brokers/ and they will be able to open an account for you.

  4. namerg says:

    Guys, thank you very much.

    One last question:
    What if my current employeer does not offer Traditional IRA ? So, I am “stuck”, right?

    My employeer offers 401(a) through TIAA/CREF and after one year offers 403(b)

    Thanks for your help,

  5. Nice article and good advice for your reader. One clarification, sometimes the old 401(k) plan will actually send a check to the former plan participant made out to the new trustee (Schwab, Fidelity, etc.) FBO (for the benefit of) the individual. This is still a trustee to trustee transfer and in this case the person would simply need to deposit the check in their IRA account.

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