I have a 401K plan that's worth about $6,000 from my ex-employer and the money is spread among 3 mutual funds. The plan administrator (AIG) wrote to tell me that they will start charging $150 a year to maintain my account. The fee is pretty steep for an account with just a few thousand dollars. I am considering to move the money to another company/bank to open an IRA or ROTH IRA there. Here are my questions:
I assume that I'll have to "sell" the mutual funds and AIG probably will charge me a selling fee. If I ask them to send the check directly to another company/bank to open an IRA or ROTH IRA within 60 days, I won't have to pay ordinary income taxes or capital gain taxes and the 10% penalty?
I think companies such as C Schwab, Edward Jones or a bank will handle the paperwork and the process for me. Is it true?
I am currently on workers comp due to a work related injury and do not any earned income. It is likely that I won't have any earned by the end of this year. With my situation, is an IRA better or ROTH IRA better, or does it make any difference?
Since the amount is not much, should I just get a CD or should I get a mutual fund?
I assume there won't be any tax consequences for the transfer from 401K plan to an IRA/ROTH. Will I still have to report the "transfer" on the income tax form at year end? If so, how will I report it? Thank you for your help in advance.
What you want to do is arrange a direct transfer from AIG to your IRA custodian. Otherwise they must withhold 20% for income tax, and you'd have to come up with that amount of cash to complete the rollover. See IRS Publication 590. As long as you complete a direct transfer there is no taxable income or penalty.
Yes. Once you've selected an IRA custodian they'll guide you through the process.
If you don't anticipate any taxable income for 2007 and your account is worth only $6,000 definitely go Roth. You'll still not have enough taxable income to have to pay anything, and future earnings will be tax-free as long as you meet the requirements for qualified Roth distributions. See IRS Publication 590.
That depends on when you think you'll need the money. If it's further away than 5 years, I'd go with something more aggressive than a CD.
See the instructions for lines 15 and 16 of the 1040.
Yes, you should transfer the money. Schwab will help you through the paperwork, and the ex-employer will either send the money directly there, or as mine did, sent a check to me payable to "joetaxpayer for further deposit to charles schwab acct # IRA". It should not be payable directly to you. Once transferred, you should convert to the Roth, as with no income, you still have a standard deduction and exemption, so even though you'll claim this as income upon conversion, no tax would be due (and no penalty to convert to Roth. JOE
You would have to ask them whether they will charge a fee for selling the funds. Many 401ks waive the loads on their funds. If they do want to charge for sale, you might want to look into having them transfer the mutual fund shares rather than the cash (assuming you are funding a rollover IRA at a brokerage that can accept fund shares). You can open a rollover IRA at most brokerages. The brokerages, such as Ameritrade, are very happy to have you, and once you get above a certain level of assets, won't charge you any annual fee. Open the account at a brokerage (I greatly prefer discount brokers, and invest in index funds or ETFs). Then, you give the account number to your former employer's plan administrator, telling them to write the check to your rollover IRA brokerage account "FBO" your name or account number. You won't have any withholding or penalty.
Some of it. You need to open an account there and tell them you will be funding it by direct rollover. Then you need to direct your 401k administrator to perform the direct rollover.
If you're still talking about your 401k rollover, I don't think you have a choice. A rollover to a conventional IRA is the way to go, since you are funding it with pretax dollars.
What you buy is not so much a function of how much money you've got. It's a function of how soon you're going to need that money, and how much risk you are willing to assume.
So long as the direct rollover is handled properly by the companies involved, you should have neither reporting nor taxes. Keep copies of all requests and statements, so that you can prove it was a direct rollover. That's just in case somebody screws up and the IRS questions the transaction. It has happened to me, once. Make sure that any distribution check is written to the company that will manage your new IRA -- if the check is written to you, things get more complicated (they'll withhold 20%, which you will have to pay from your own pocket when funding the rollover IRA, to avoid penalties).
Not exactly. Converting the mutual funds to cash will be taken care of by the plan adminstrator. If transferred directly to the IRA custodian, there will be no tax or withholding taken out. Incidentally, a tax deferred account (like a 401K or IRA) does not generate capital gains.
Yes, those and scores of other financial institutions, such as Vanguard and Fidelity.
A rollover from a 401k can only be made to a traditional IRA. Conversion to a Roth IRA, if desired, is a separate transaction.
Since these are supposedly "retirement funds", not to be tapped for many years, do you want your investment to grow (mutual funds) or just return a stodgy 4-5% for a long time?
Partially correct. The rollover transfer from the 401k to the traditional IRA is tax free, and reported as such on line 16a/b of your 1040 form. Conversion of the IRA to a Roth IRA is a taxable event, subject to ordinary income tax (but not penalty), and is reported on line 15a/b of the 1040 form.
The easiest thing is to open the account with your new company, give them the information about your 401K and they will transfer all the assets into your new account. Then there won't be any problem with penalties or taxes or rolling funds over within 60 days, because you will not touch the money. The account will have to be rolled over into a traditional IRA in order to a remain tax free. When you take money out at retirement, you pay tax on it then. You can also convert it to a Roth IRA once it is rolled over into your new traditional IRA. You will then have to pay tax on the entire amount now, but when you retire, withdrawals would be tax free. Since you aren't earning income this year, this might be a good time to convert it to a Roth IRA and pay tax on it. The money would be added to any other income and you would pay tax on the total amount of income for 2007. When you rollover your 401k, AIG will send you a 1099 next year which will have to be reported on your tax return. But none of it is taxable if transferred to a traditional IRA. Line 16a would report the $6000 and line 16b would be zero, with the word rollover written to the left of the number. Whether you invest in a CD or mutual funds depends on how long you have until retirement and what other retirement funds you have.
Not necessary to "sell" anything. Your holdings can simply be switched directly in a trustee-to-trustee transfer (which is true for most 401K plans -- but subject to the specific rules set for each plan). Select your new trustee, and ask them to help "engineer" the process. Most will assist you.
Asked and answered.
A traditional IRA will not result in any income, so no issue there, and that's the only option you have to convert a
401K. Even if you decide to convert to a Roth IRA, you first have to "set" the tradtional IRA -- then _convert_ it. This conversion creates an ordinary income event, which will result in a 1099R Distribution, and that will be taxable (though if your total income is low enough, that may not be a significant issue).
Can't really answer this for you, without knowing more. Your age, investment goals, other resources are all factors. You'll have to make the call, taking everything into consideration.
As noted above, you can't "transfer" a 401K into a Roth. That would mean a taxable distribution, and -- if you're under 59 1/2, an additional 10% penalty tax _below the line_ (i.e., beyond normal income taxes, reported on line 60 for the 2006 Form 1040). A trustee-to-trustee transfer conversion to a traditional IRA should not be a taxable event. If a 1099 were generated, it would be reported on
1040 LIne 15a and noted as a "Rollover" with no amount on
15b. Bill
For numerous reasons it is rarely wise to leave money with an old employer. You have less control, access to plan administrators can be difficult, further contributions are curbed, fees are often higher in qualified plans (even if you don't see them outright), fewer investment choices, and more limited stretch/inherited provisions often exist in
401(k)s.
You can often transfer the securities "in-kind", although I have seen instances where the original custodian insisted the account be liquidated (this makes them money). Converting the 401(k) to a Roth can cause you problems. Start with an IRA. The roth is post-tax dollars and the
401(k) is pre-tax. You will have to pay ordinary income tax on the full value of the account if you convert to a Roth. However, a Roth may be best for you in the long run. I do not know enough about you to answer that. The 10% penalty will not apply if the rollover is done within 60 days and you have not already done a rollover in the past year. A direct trustee to trustee transfer would be best (no worries about time limits and no 10% penalty).
Any company worth looking at will handle the paperwork. HOWEVER, many companies have a nasty habit of requiring their own forms. So you may go to Chuck Schwab, they will have you open a new IRA and fill out a rollover request, and they will bid you good day. A week later you'll get a notice that the rollover was rejected because AIG requires that their own paperwork be filled out. If they didn't include the AIG paperwork, you will have to contact them for it and reinitiate the rollover. If your lucky, none of this will happen. But I run into it alot. Once you have accumulated a consensus of good info online, ask the financial planner you meet with the same questions. If he/she can't tell you this stuff, walk away.
Hard to say. The conversion to a roth may be feasible now because of your low marginal tax bracket. But things like cash flow needs, std deduction or itemization, etc could muddy the waters. Also, is the disability permanent?
That's a risk tolerance preference that we cannot answer. If you want a very safe, low return investment go with a CD or bonds. If you can stomach more volatility and desire greater returns, go with mutual funds. Investment time horizon will also be a deciding factor. Vanguard offers the famous total stock fund (VFINX). Very low expenses, good exposure to the S&P 500. Of course you can get as creative as you like with a couple of international and/or small-mid cap funds.
Bad assumption. Read above.
Your welcome. Not to downplay this group, but you have many non-tax related questions/needs. I would repost this on misc.invest.financial- plan also. You'll double the number of responses in half the time and get great advice from BOTH groups on different aspects of the situation.
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