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Be Wise With Money
Let it Roll
November 3, 2014 | Heather Boerner; excerpted from Thrivent magazine
Is it a good time to move 401(k) accounts into individual retirements accounts?
Imagine having four, six or eight 401(k) accounts. Talk about a headache: Remembering where they all are. Comparing what they're invested in to make sure you have the right mix. Tracking how they're doing.
For many, the solution is to move retirement assets to a federal income tax-advantaged individual retirement account (IRA). It's a process known as a rollover. It can be done with many employer-sponsored, qualified retirement plans, including 401(k) and 403(b) accounts, profit-sharing accounts, employer stock option plans and 457 accounts for government employees.
Tax season is a common time for rollovers, but they can be done at any time of year – and for many reasons:
These days, people change jobs more frequently. When you leave a job, most employers allow you to withdraw retirement accounts and roll them into another qualified plan, such as an IRA.
After a divorce, community assets are often divided, including retirement accounts. If you're left with a portion of your ex's 401(k), it might be easier to manage if you move it to your own IRA.
Death of a spouse:
After a partner dies, the surviving spouse may want to roll over a spouse's 401(k) into his or her own IRA – but should consult with a tax advisor before doing so.
Termination of 401(k):
Struggling companies may drop their 401(k) plan to preserve other benefits. If this happens, you might not have a choice but to move the money to another type of account.
With some companies, if you go on extended long-term disability, you're no longer considered an employee and have the option to roll over your 401(k). Rolling it over may give you more options about how to use the funds, and your financial representative and tax advisor may be able to help you figure out how to do it with fewer penalties and taxes.
You've reached age 59½:
At 59½, many 401(k) plans allow you to take a distribution from the plan, even if you are still employed. That money can be rolled over into an IRA. The advantage of such a move is also tied to being 59½ or older: The IRS allows you to begin pulling money from an IRA without the 10% federal tax penalty for early withdrawal. So if you want to take out funds eventually, it might be a good idea to put them in an IRA first so you can get this benefit.
"An IRA rollover may offer you better control of your money – not to mention making retirement planning easier," says Karen Birr, an advanced retirement specialist at Thrivent Financial. "By going with an IRA, you have the ability to diversify your investments to reflect what your short- and long-term savings goals are."
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There may be benefits to leaving your account in your employer plan, if allowed. You will continue to benefit from tax deferral, there may be investment options unique to your plan, there is a possibility for loans, and distributions are penalty free if you terminate service at age 55+.