Roll Over Your 401(k)/403(b)
Understanding the ins and outs
by Cynthia Holden –Merrell
A common financial question asked by relocating military spouses is, “I have money in my 401(k) plan or 403(b) plan. What do I do with this money when we move and I leave the company?”
Both retirement plans allow employees to take a certain percentage of their salary and place it into investments within the plan. A 401(k) is typically offered by for-profit companies, whereas 403(b) plans are offered by non-profits and educational institutions. They allow pre-tax contributions, and the investment growth within the plan is not taxed. Thus, they are referred to as tax-sheltered accounts.
When you leave a company, you can no longer contribute to the account. Therefore, it may make good sense to pull the money out. However, it must go to another tax-sheltered account. If it doesn't, then the IRS can impose tax penalties.
To avoid taxation, you can do a few things. A very common option is to set up an IRA rollover. An IRA rollover is a tax-sheltered account that adheres to a few rules. These include:
• The money rolled over cannot be taken out without additional tax penalties until the age of 59. After that, it is taxed at a normal tax rate.
• Exceptions can apply if the money is being used for education expenses, first-time homebuyer expenses (up to $10,000), medical expenses, death and disability.
• Money also can be taken out without penalty if it is put back within 60 days. This, however, can be done only once a year.
• The owner of the IRA must start taking minimum distributions (money out) from the IRA by April 1 of the year after reaching the age of 70. For example, if you turned 70 on Jan. 1, 2004, then you had until April 1, 2005, to start taking distributions.
Rolling over 401(k) money is very simple. The first step is to set up an IRA rollover account at a brokerage firm, mutual fund company or bank. Next, contact the person that handles the 401(k)/403(b) plan for your company and ask them what paperwork is needed. Then you can make a decision as to how to invest. For example, you can put it in mutual funds, CDs, stocks, money markets or other vehicles. You should work with your broker or banker.
You can also roll over into an existing IRA using the same procedure, but without opening a new account. You will need to keep records indicating that the money is a rollover because your existing IRA has a $4,000 contribution limit each year. Otherwise, you run the risk of the IRS thinking that you over-contributed.
You can also explore the possibilities of rolling the money into a new 401(k)/403(b) plan. This only applies if you take another job that offers a 401(k)/403(b) and will accept the money. This has been more common in the last few years.
Cynthia Holden-Merrell is a Navy Spouse and licensed financial adviser.