Taxes: Failing to roll 401K into an IRA
Hi, I just read this information on MarketWatch regarding 401K rollovers to an IRA. I’m confused by what Beverly DeVeny stated, perhaps you can clarify it for me, please?
http://www.marketwatch.com/story/correct-seven-costly-ira-rollover-mista… (downloaded 12 Aug 2009):
1. Failing to roll
The first big mistake is, of course, not doing a rollover at all, according to Beverly DeVeny, the IRA Technical Consultant at Ed Slott and Co. If you don’t do a rollover, you’ll be taxed. Plus, you’ll fall even further behind in your attempt to build a nest egg.
The statement “If you don’t do a rollover, you’ll be taxed.” confuses me as to when I’ll be taxed if I don’t do a rollover.
From my understanding, when I left my previous employer, I was allowed to keep my 401K account open with him (which I have) until I rolled over the amount into an IRA, if I chose to do so. But if my account is doing well, and I like the mutual funds within that account, must I roll my account over into an IRA? And if I don’t roll it over, will I have to pay taxes on the account at an earlier time or only when I begin taking withdrawals (in my case at age 70 and 1-month, perhaps a bit earlier)? Please advise.
Thank you.
Terry
Permalink Submitted by Alan Spross on Tue, 2009-08-11 03:23
Terry,
You can only be forced to move your 401k from a former employer if the balance is under $5,000. If more than that, it is your choice whether to roll it over to an IRA or not. You will not be taxed if you leave the funds in the 401k. If you elect to move the money to an IRA, it should be done by a direct rollover to avoid mandatory 20% withholding. If you have a check made out to you, then both the amount paid to you and the 20% withholding paid to the IRS will be taxed in that year, and may also be subject to a 10% penalty if you are under 59.5.
The main point of the article is to warn people that take out the funds and then FAIL to complete a rollover within 60 days. It does not apply to direct rollovers to an IRA, which is by far the best way to get the funds moved to an IRA. But you do not HAVE to move the funds to an IRA if you do not want to and believe that your options within the plan and the expenses charged by the plan are acceptable to you.
Permalink Submitted by Terry Eusebio on Mon, 2009-08-24 10:20
Hi Alan-Oniras, sorry for the late response, but Thank You for the clarification.
Terry