Threading the Needle: Mastering 401(k) To IRA Rollovers

The Federal Government legislates retirement plans to encourage long-term investing through the silver of tax deferral and lead of severe penalties for breaking The Code. For many, the 401(k) to Traditional IRA rollover is a job change and retirement rite of passage. Onyx will guide you through this complex process.

The 401(k) to IRA Rollover

Internal Revenue Code Section 401(k) specifies that employees are not taxed for deferred compensation. 401(k) account contributions are made with pre-tax money, and capital gains and investment income grow tax deferred until withdrawal. 401(k) distributions are taxed as ordinary income.

The IRS generally levies a ten percent additional tax penalty on 401(k) withdrawals made before age 59 ½. Traditional IRAs are structured similarly, with pre-tax contributions, tax deferral, and ordinary income distributions, which does lay the groundwork for near seamless 401(k) to Traditional IRA rollovers. Savers must take IRA required minimum distributions (RMDs) and pay taxes at age 72.

For 2024, savers are limited to $7,000 in Traditional IRA contributions. Savers who are at least 50 years old may make an additional $1,000 in catch-up contributions. For the sake of comparison, employees may make $23,000 (plus $7,500 catch-up for $30,500 at age 50) in 401(k) contributions for the year.

IRA Investment Decisions

401(k) investment options are typically limited to the mutual fund whims and preferences of your human resources department, whereas the IRA grants access to the entire Financial Universe. Banks, mutual fund companies, brokerages, and insurance companies do offer IRAs.

Dividend reinvestment (DRIPs) and direct stock purchase plans (DSPPs) with large corporations were once popular IRA funding options for long-term investors. Now, discount brokerages and commission-free trading has made much of direct investing obsolete. Investment plan administrator Computershare recently shut down all of its IRA account offerings.

Financial Risks

Avoid cashing out old 401(k) money yourself before initiating the Traditional IRA rollover. Unwitting savers who personally hold 401(k) cash distributions for any amount of time may be subject to severe tax penalties. Allow firms to communicate directly between themselves – to best execute the 401(k) / IRA rollover.

The IRA, of course, does not promise perpetual tax deferral. Again, required minimum distributions must be taken at age 72, and are calculated as a function of your account balance and life expectancy. Failure to take your IRA RMDs will result in a 50% tax penalty upon the amount of money that should have been withdrawn.

Here, we expect for amateur investors to suffer from paralysis by analysis. The Financial Universe, with its insider jargon, account classes, byzantine tax ramifications, stocks, bonds, and mutual funds is all-consuming and daunting.

Talk to Onyx Investments to best map out your financial future and life plan.