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IRS 401k Rules

401k and IRA Rollovers

IRS rules, 401k regulations and rollover law can be confusing for many investors. For many Americans, 401k regulations and IRS rules are particularly important since the dollars they’ve accrued in company-sponsored 401(k) retirement plans represent the largest assets they own. If you have participated in a retirement contribution plan for a number of years, your accumulations may represent a significant source retirement income.

Most 401(k) plans provide an early withdrawal option when a “benefit event - which typically means changing jobs, retirement, or electing to receive money accumulated in a retirement plan by doing a 401k rollover.
It’s important to remember that some choices can come with hefty tax penalties. Many individuals often fail to pay close attention to the IRS 401k rules regarding the tax consequences of withdrawing

In a typical 401(k) plan, individuals taking an early lump sum distribution bear the automatic tax penalty which is 20% of the payout. Investors familiar with the 401k rules and regulations and with professional guidance may avoid all of these tax penalties by conducting a correct 401k to IRA Rollover.
With regular withdrawals, because the payout is considered part of your income, 20% of your earnings are withheld and allocated for federal income taxes that you may owe on your earnings. If withdrawing funds before age 59 , you may also be subject to a 10% penalty. Further, you can also expect to pay 10% in taxes, in addition to any income taxes paid on the lump sum.

There are steps you can take to protect your distributions from your company’s retirement account from tax penalties. Establishing an IRA helps ensure that you keep all your retirement plan contributions intact, because no taxes are withheld from your contributions. You can transfer any amount to a rollover IRA, and choose a variety of investment options for your dollars, once the account is in place.
The ideal way to do this is known as a “trustee to trustee transfer meaning that the funds are deposited directly into your IRA account from your former employer plan or other retirement account.

If changing jobs or retiring your former company may require you to transfer your retirement funds or you may decide that you wish to have the added control over your plan by rolling it into your own IRA account.
Consider the option of creating a direct rollover IRA within 30 days of your last day of work. In many cases, your previous employer will be able to write your distribution check for deposit into your new IRA, by using a direct rollover. In a direct rollover, your former employer makes the distribution check out in the name of the trustee or the custodian of the IRA you’re designating to receive the rollover funds. Otherwise, if the company makes the check out to you, 20% will be withheld for taxes and you will have 60 days to deposit into a new qualified retirement account and then request a refund when you file your income taxes..

A 2001 IRS rule provides a “second chance for individuals who may have missed the 60-day rollover deadline. It may be possible to get a rollover extension by requesting a "private-letter ruling" from the IRS.
In almost all cases it is ideal for investors to do a trustee to trustee or direct transfer.

Rollover contributions and earnings are taxed as ordinary income when withdrawn after age 59 , and, as mentioned earlier, withdrawals before the age 59 are taxable and subject to a 10% penalty. To avoid penalties for withdrawing funds “too late , withdrawals must begin by age 70 , these are called RMDs or Required Mandatory Distributions.

New retirement plan portability rules allow individuals to consolidate their retirement funds into a single IRA. This option works well if you are retiring or just changing jobs. New rules allow 401(k) plans to be rolled over into a rollover IRA, and now also include 403(b), 401(k) or 457 plans. If you have retirement funds at various companies, it may be a good idea to simplify your recordkeeping by combining them into one traditional IRA.
Atlantic Financial can assist you in consolidating your various IRA and other retirement accounts and in selecting investments and helping you monitor them on an ongoing basis.

Since 1994, Atlantic Financial has been helping individuals roll over 401k plans into IRA accounts. Our full range of integrated financial, estate planning and tax services can accommodate the most discriminating investors while our personalized education-driven approach appeals to investors in need of active advice and service.

Want to see what Atlantic Financial can offer your company through a Fidelity Advisor 401k Plan?
Click this PDF document

If you would like us to assist you with your corporate 401k plan or answer any questions you may have, please email us (please be sure to include your name and phone number in your email), or contact us





Sources and Disclosures

Source: Mutual of Omaha Companies
- October 6th, 2000

The telephone survey, completed in May 2000, of people participating in company sponsored 401k plans has a margin of error of plus or minus 5.5 percentage points at a 95% confidence level.



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