Rolling over a 401(k) retirement plan is a process by which assets within an employer 401(k) retirement plan are placed into another account, specifically an Individual Retirement Account (IRA). Since there are variations in 401(k)'s and IRA's, in addition to variance in personal financial circumstances, it is important to realize not all 401(k)'s can be rolled over, or rolled over in the same way.
Step 1: Determine if the 401(k) is qualified
Step 2: Become aware of rollover options
Step 3: Choose type of rollover and IRA
Step 4: Complete rollover and/or distribution forms
Step 5: Tax reporting
1. Qualified vs Non-Qualified Rollovers
Qualified 401k's can be rolled over into both Roth and Traditional IRA's however Roth 401(k)'s may not be rolled over into a traditional IRA. Thus, the first step in rolling over a 401(k) is to determine if the 401(k) qualifies for the rollover. Some of the rollover options available are listed below and viewable at the following IRS rollover chart:
• 401K to Roth 401(k)
• 401K to SEP-IRA
• 401K to traditional or Roth IRA
Even if the 401(k) is eligible for rollover, certain conditions such as age, amount of rollover, and nationality may apply. For example, if the employee seeking the rollover is above age 59.5 years of age, a distribution may be required by law and the terms of the IRA. Rules for 401(k) rollovers are determined by Title 26 of the US Code and enforced by the Internal Revenue Service. The 401(k) plan itself can also determine the extent and possibility of rollover into an IRA.
2. Rollover asset management options
Rollover IRA's are available from many organizations and/or financial institutions. If you are moving from one employer to another, the rollover may be from a 401(k) to an employer Roth 401(k). In other instances, the rollover may be from a 401(k) into an individually managed IRA. Rollover asset management options include the following:
• Employer to employer
• Employer to Insurer
• Personal business to financial institution
• Employer to Financial Institution (institutionally managed)
• Employer to Financial Institution (individually managed)
3. Type of Rollover
After choosing an IRA, there are two types of rollover, 1) direct and 2) distribution. In a direct rollover, the rollover is coordinated between your employer/401(k) manager, and the IRA manager. This method avoids the possibility of tax penalty from distribution outside the 60 day period allowed for distributions to be rolled over.
In a rollover distribution, the employee has more control over the process, but is also more responsible for ensuring the completion of the rollover. In some cases assets may be transferred from a 401(k) without having to be sold, however, in other cases cash only rollovers may be required.
4. Complete rollover and/or distribution forms
This step is somewhat self-explanatory. To execute the rollover, legal documentation has to be completed and forms are provided by the employer and IRA account issuer in order to complete this process. Some examples of 401(k) rollover forms include identity confirmation documents, IRA application and transfer receipt forms, employer authorization forms, and employee transfer authorization form.
5. Tax reporting:
As per the IRS, some 401(k) rollovers must be reported as income on tax returns in the pension and annuity line of your tax return which is comprised of an a and b box. In the a box indicate the gross amount of the rollover, however in line B of the IRS Form 1040, the value should be $0 if no other pension or annuity income is received.
Next to the b box value place the words rollover next to it so that the rollover is not taxed. In the 2008 IRS Form 1040, the pension and annuity line is within the income section of the form on line 16. For more details specific to an individual tax situation consult the IRS or a tax preparer.
In summary, 401(k) rollovers to IRA's are fairly straightforward but do require certain conditions to be met in order for the rollover to take place. These conditions are determined by the 401(k) type and policy, in addition to the regulations implemented by the U.S. Internal Revenue Service.
It is important to discuss your rollover accounts and options with your employer, IRA administrator prior to initiating the rollover to confirm eligibility for the rollover, obtain proper rollover forms and to carry out the rollover. The above steps are a general outline of what is required for a 401(k) rollover, however specific regulations, rules and policies may also apply.
Image source: Internal Revenue Service
This article will outline key aspects of the 401(k) rollover process, and the steps involved in the 401(k) rollover. Essentially, the rollover of a 401(k) into an IRA can be comprised of 5 steps, each of which have sub-steps within them, those steps are as follows.Step 1: Determine if the 401(k) is qualified
Step 2: Become aware of rollover options
Step 3: Choose type of rollover and IRA
Step 4: Complete rollover and/or distribution forms
Step 5: Tax reporting
1. Qualified vs Non-Qualified Rollovers
Qualified 401k's can be rolled over into both Roth and Traditional IRA's however Roth 401(k)'s may not be rolled over into a traditional IRA. Thus, the first step in rolling over a 401(k) is to determine if the 401(k) qualifies for the rollover. Some of the rollover options available are listed below and viewable at the following IRS rollover chart:
• 401K to Roth 401(k)
• 401K to SEP-IRA
• 401K to traditional or Roth IRA
Even if the 401(k) is eligible for rollover, certain conditions such as age, amount of rollover, and nationality may apply. For example, if the employee seeking the rollover is above age 59.5 years of age, a distribution may be required by law and the terms of the IRA. Rules for 401(k) rollovers are determined by Title 26 of the US Code and enforced by the Internal Revenue Service. The 401(k) plan itself can also determine the extent and possibility of rollover into an IRA.
2. Rollover asset management options
Rollover IRA's are available from many organizations and/or financial institutions. If you are moving from one employer to another, the rollover may be from a 401(k) to an employer Roth 401(k). In other instances, the rollover may be from a 401(k) into an individually managed IRA. Rollover asset management options include the following:
• Employer to employer
• Employer to Insurer
• Personal business to financial institution
• Employer to Financial Institution (institutionally managed)
• Employer to Financial Institution (individually managed)
3. Type of Rollover
After choosing an IRA, there are two types of rollover, 1) direct and 2) distribution. In a direct rollover, the rollover is coordinated between your employer/401(k) manager, and the IRA manager. This method avoids the possibility of tax penalty from distribution outside the 60 day period allowed for distributions to be rolled over.
In a rollover distribution, the employee has more control over the process, but is also more responsible for ensuring the completion of the rollover. In some cases assets may be transferred from a 401(k) without having to be sold, however, in other cases cash only rollovers may be required.
4. Complete rollover and/or distribution forms
This step is somewhat self-explanatory. To execute the rollover, legal documentation has to be completed and forms are provided by the employer and IRA account issuer in order to complete this process. Some examples of 401(k) rollover forms include identity confirmation documents, IRA application and transfer receipt forms, employer authorization forms, and employee transfer authorization form.
5. Tax reporting:
As per the IRS, some 401(k) rollovers must be reported as income on tax returns in the pension and annuity line of your tax return which is comprised of an a and b box. In the a box indicate the gross amount of the rollover, however in line B of the IRS Form 1040, the value should be $0 if no other pension or annuity income is received.
Next to the b box value place the words rollover next to it so that the rollover is not taxed. In the 2008 IRS Form 1040, the pension and annuity line is within the income section of the form on line 16. For more details specific to an individual tax situation consult the IRS or a tax preparer.
In summary, 401(k) rollovers to IRA's are fairly straightforward but do require certain conditions to be met in order for the rollover to take place. These conditions are determined by the 401(k) type and policy, in addition to the regulations implemented by the U.S. Internal Revenue Service.
It is important to discuss your rollover accounts and options with your employer, IRA administrator prior to initiating the rollover to confirm eligibility for the rollover, obtain proper rollover forms and to carry out the rollover. The above steps are a general outline of what is required for a 401(k) rollover, however specific regulations, rules and policies may also apply.
Sources:
1. http://www.irs.gov
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