Rollover, or Direct Transfer, of your IRA, 401-k, SEP, 403-b, 457. aaa Plans eligible for a rollover or direct transfer are your IRAs, 401(k) plans, SEP’s (Simplified Employee Pension), 403-b’s (A Tax Sheltered Annuity- utilized by teachers and employees of schools and Universities), or 457 plans (a retirement plan for state, or county employees). Let’s talk about an IRA first. You can rollover, or “move”, your IRA (Individual Retirement Account) to different savings or investment vehicles at your discretion, as your savings or investment strategies change. Upon moving or rolling over an IRA, you will still have the label of IRA with your new plan. You can roll over your 401-k, your 403b, your SEP plan, or your 457 plan if you leave your employer, if you retire, or if you become disabled. You can move your retirement plan to an individual IRA and maintain your retirement savings or investment strategies, or change them if you desire. Generally, rollovers from a qualified retirement plan are only permitted upon a “triggering event” such as death, disability, attainment of age 591/2, separation from service, or plan termination.  There is another circumstance by which you can move part of your retirement plan into an IRA, known as an “in-service transfer”. Taking an “in-service transfer”, a distribution from your 401(k) while you are still employed may be possible if your retirement plan document permits such a transfer. Again, generally, distributions from a qualified retirement plan are only permitted upon a “triggering event” such as death, disability, attainment of age 591/2, separation from service, or plan termination. However, the plan document may allow for a non-hardship distribution even if no triggering event has occurred. Typically, profit sharing plans, or 401(k) plans that are part of a profit sharing plan, permit in-service distributions. Stock bonus plans may also permit non-hardship withdrawals. If moving your 401-k is of interest to you, you should consult the plan administrator to determine whether your qualified retirement plan permits in-service non-hardship distributions. You should understand that you cannot take a non-hardship distribution of your entire account. Even if the plan document permits in-service non-hardship distributions, there are still typically two limitations on the distribution: (1) only certain employer contributions can be distributed and (2) the monies must have been in the plan for at least two years.* If you are over 591/2, your own salary deferrals may also be available for an in-service distribution. Again, the plan administrator should be consulted regarding any limitations that a particular qualified plan may impose on in-service non-hardship distributions. Note *In Revenue Ruling 68-24, the IRS permitted withdrawal of monies that had been in the plan less than two years where non-hardship withdrawals were available only to employees who had participated in the plan for five years or more. Also, you must check with your plan administrator to determine whether taking an in-service distribution will restrict your ability to contribute to the plan in the future. If you are under age 59 1/2, and still working for the employer who sponsors the plan, and you do not roll the proceeds to an IRA or other tax-qualified plan, a 10% early withdrawal penalty may apply to the distribution in addition to taxation as ordinary income. What is the difference between a direct rollover and an indirect rollover? With a direct rollover of a 401(k) distribution into an IRA, the money is sent directly to the institution. With a direct rollover, no federal income tax withholding is required. With an indirect rollover, the distribution is sent to you and the 401(k) plan is required to withhold 20% of the distribution for federal income tax withholding. State income tax withholding may also apply. Keep in mind that the 20% is not an actual tax, it is only withholding that is applied toward the actual tax. You may be able to get a refund when you file your income tax return for the year of distribution, if your total income tax payments (including the withholding) exceed your actual income tax liability. The problem with an indirect rollover is that if you want to roll over your entire 401(k) distribution, you will have to use other monies to make up the amount that is withheld. Failure to do so may lead to substantial financial consequences. You also have only 60 days to complete the transfer. If you are less than 59 ½, a 10% penalty on the “withheld” amount may apply. |
