401K money transfer

[Jacob Mathai]

If you already do not know about it. It applies to people 59 1/2 yrs or older only.

You can transfer money from your 401K as a rollover to another institution as an IRA. In my case I was eligible to transfer about 95 percent of money to another institution. I am closer to retirement. A big percentage of my money was in a stable value fund getting around 4.5 %. I transferred the money to another institution getting 6.25% on a Certifcate of deposit. Now the IRA money in Banks/Credit unions are insured up to 250K (regular accounts only up to 100K). I had the choice of transferring my money to any institution that handles IRA. I chose to put money in a CD. I could have invested in stocks/Bonds etc.This plan is called '59 1/2 Rollover'. You do not have to wait for retirement to do this rollover. Because it is a rollover, there are no tax consequences now.

Those who do not know what a 401K is, let me explain. In USA, it is the tax deferred savings plan. Employees can save up to 15,500 dollars (20,500 if you are 50 or above) in 401K plan in 2007. We do not pay taxes on this money now. We pay taxes on this money when we withdraw it later (59 1/2 age minimum). The are some strict rules that govern this plan. I only gave a brief idea.

 

[The_Doc_Man]

Actually, Jacob, you don't have to wait until 59 1/2 to do such a transfer if it is from a qualified plan to another qualified plan AND you do so using a form that authorized a direct transfer of the funds between the current and new investment companies. The only catch is that the actual money must never go through you bank account. Because the latter represents a distribution and re-investment. The distribution is taxable, the re-investment has no effect on the taxes on that distribution.

 

[Jacob Mathai]

Dear DOC_MAN,

The situation you described works when you change jobs or retire before 59 1/2. I am showing a scenario where I continue to work for the same company and transferring 401k money to another institution. I am told I have to be 59 1/2 to do this rollover.

 

[The_Doc_Man]

Negative, Jakob. As long as you use the transfer of custody approach, you can gut your retirement plane from the company (if it is a 401(K) plan) and move it to a separate, personal 401(K) or other tax-deferred account. I think a 403(B) also works, but I guarantee the personal IRA works as a target.

To be safe, if you have a personal IRA, use THAT as a target for the transfer. Remember, it must NEVER pass through your bank account. It must be directly custodian to custodian. In fact, if you DON'T have an IRA, go to your favorite financial institution, talk to their investment counselor, and ask for help in setting up the IRA using the transfer of custody as the source of the funds.

Now, there might be conditions on the money in your retirement plan, such as end-loading (i.e. broker fees for outgoing transfers) or interest-only penalty for withdrawal before an interest accrual date. (I.e. six-month maturity of a Certificate of Deposit and you only keep it three months.)

There is also the issue of vesting. If you aren't fully "vested" in your company's matching funds because of longevity requirements, you cannot touch the part that is potentially unvested. But the part you have deposited from your own paycheck is yours right now for transfer purposes. The part in which you have vesting is also yours right now.

There is, however, the issue of whether your 401(K) held by your employer's brokerage agent is doing well right now. If it is gaining ground with respect to the stock market, perhaps leaving it where is would be a good idea. Only you and the broker would know whether it is doing well. Or your bank's investment counselor could tell you.

 

[GaryPanic]

Pensions - your just as messed up as the rest of us
g

 

[Jacob Mathai]

Thanks to The Doc Man. I learn something new everyday. I am counting on my 401 K for my retirement income. So far, I did pretty good with my 401K.

By the way, when Congress enacted the 401k plan, they never thought the plan will become popular. It was section 401 (K) of the tax code or budget (or something like that). If they knew it would be popular, it would have the names of some Senator and/or Rep to the House.

Later when they created a new 401 K/IRA, it became Roth IRA (Sen. Roth from Delaware).

401 K is becoming the retirement income vehicle for employees as Traditional pension plan is being phased out by many employers.