When you leave a job where you have money invested in a defined contribution plan such as a 401k, or 403b you have the option of rolling that money into a personal IRA account. Should you do so?
At Mentor, we frequently address this issue with new clients. Often such investments from old jobs have sat neglected in the account for years. The owner either was unaware of the options or simply didn’t have any better idea of what to do.
The simple answer is that, yes, a rollover often makes sense. But you should be aware of the pros and cons before making a decision.
IRS rollover rules
Any money taken out of a retirement account is a distribution and will be a tax-free roll-over if it meets the IRS requirements. The best way to do this is called a trustee-to-trustee transfer because the money never passes through your hands.
Alternatively, you can take out the money and then put it into an IRA within 60 days. But the company must withhold 20% in taxes. To accomplish a fully tax-free rollover you would then have to make up this 20% out of your own pocket. And, if you miss the deadline, the entire amount is taxable.
Taxable distributions are taxed at your ordinary income rates and additionally subject to a 10% premature withdrawal penalty if you are less than 59 ½ years old.