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

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