Question

Which of the following rollovers is NOT allowed? *

Rhys has left his employer and has directed the trustee of the employer plan to directly transfer the balance of his account to his traditional IRA. Rhys has no after-tax contributions to the plan.

Gabrielle has two traditional IRAs that are not performing as well as her third traditional IRA. She has requested distributions from the first and second IRAs and plans to deposit the proceeds in the third IRA within 60 days.

Clarence has decided to consolidate his five traditional IRAs. He has notified the trustee of each IRA to send the account balance to a new, sixth traditional IRA.

Sumaiya changed jobs this year. She had a 401(k) at her old job. Her new job has a 401(k) plan, as well. She has requested for the trustee of the old plan to send her account balance to the trustee of the plan at her new employer

Answer 1

Once you are no longer employed, the rules change. At that time it may make sense to roll funds from your plan into an IRA account. To avoid tax withholding, you'll want to choose what is called a direct IRA rollover where the check is made payable to your new financial institution as the new trustee or custodian.

Hence, Rhys rollover from employer plan to his traditional IRA after leaving the employer is allowed.

You can consolidate retirement accounts by transferring money from multiple accounts into one established IRA account (or into a new IRA you open). This is called an IRA rollover. Here are several good reasons to consolidate your IRAs, 401(k)s, and other retirement accounts.

Easier to Manage Investments,Reduced Fees,No Missed Required Minimum Distributions,More Free Time and Easier for Beneficiaries

Hence, Gabrielle and Clarence rollovers are allowed as they are consolidating retirement accounts to an established IRA or a new IRA.

Each option for an old 401(k) has advantages and disadvantages, and there is not a single selection that works best for all employees. However, if an employee is considering the option of transferring an old 401(k) plan into a new employer's 401(k), certain steps are necessary.

KEY TAKEAWAYS

• In some cases your new employer’s plan may not accept rollovers from another 401(k), so ask the HR department of your new company about this.
• The biggest advantage in doing a rollover is the simplicity of management afforded by keeping all your funds in one place.
• The biggest disadvantage in doing a rollover is that your investment options are limited by how the plan is run; you have little say in choosing the asset allocation

Rolling Over to a New 401(k)

The first step in transferring an old 401(k) to a new employer's qualified retirement plan is to speak with the new plan sponsor, custodian, or human resources manager who assists employees with enrolling in the 401(k) plan. Because not every employer-sponsored plan accepts transfers from an outside 401(k), it is imperative for a new employee to ask if the option is available from the new employer. If the plan does not accept 401(k) transfers, the employee needs to select one of the three other options for the 401(k) account balance.

If the new employer plan accepts 401(k) transfers from other companies, there is often a substantial amount of paperwork that must be completed by the employee. The paperwork is provided by the new plan sponsor or human resources contact and requires the name, date of birth, address, Social Security number, and other employee identifying information.

In addition, the 401(k) transfer form must provide details of the old employer plan, including total amount to be transferred, investment selections held in the account, date contributions started and stopped, and contribution type, such as pretax or Roth. A new plan sponsor may also require an employee to establish new investment instructions for the account being transferred on the form. Once the transfer form is complete, it can be returned to the plan sponsor for processing.

Hence, Sumaiya’s rollover from 401(k) at her old job to 401(k) at her new job will not be allowed unless the option is available with the new employer.