Can you just transfer the account? I understand that you lose any positions that aren’t vested.
You lose any employer contributions that aren’t vested. You can either leave the rest in the account and let it grow (hopefully) without additional contributions or transfer it to your 401k with your new employer. I think you can transfer it into an IRA as well.
Roll it over into an IRA. Different name–same ol’ tax deferral.
^ GM is there an advantage to rolling it into an IRA instead of transferring it into the 401k at the new employer? For example, if you are not eligble to open a traditional IRA because of your income, would you be able to open one for the purposes of rolling over your 401k balance?
There is no such thing as “not eligible because of income”–not with a traditional IRA, anyway. And yes, you can open one for the purpose of rolling over 401k. If you already have one, I’d just roll it over into that one.
And the main advantage of an IRA is that it is at the custodian of your choosing (Wells Fargo, E-trade, Merrill Lynch) and you’ll have more investment choices and better control of the funds.
The main disadvantage–you cannot borrow against your IRA, while you can borrow against a 401k.
I would check to see what investment offerings there are at your new 401k. If they mutual funds they offer are awesome, then I might do that. (E.G. when I worked at Chase, they had a S&P 500 index fund with an expense ratio of 2 bps. Yes–.02% per year.)
Also, I doubt that you can “transfer the positions”. You’ll have to sell the positions to convert to cash, then transfer the cash, the re-purchase the positions you want.
It was my understanding that if your AGI exceeds $115,000, your IRA contributions are not tax advantaged. Is that not correct?
If you are fully vested, you can keep the employer contributions if not you will only keep your personal contributions. I suggest rolling it into an IRA in order to give you greater flexibility in investment selection. If you have a qualified plan at your new employer, future contribution to your IRA will not be tax deductible if you are single and your AGI is >$69K or married and your AGI is >$155K. Your IRA will continue to grow tax-deferred. Be sure to keep track of any non-tax deductible contributions made to your IRA, so that you are not taxed on those already taxed dollars when you make distributions during retirement.
Those are not IRA contributions. They are 401k contributions.
Once you exceed a certain AGI, you cannot deduct your IRA contributions. (It begins being phased out at $92k for married folk and is completely phased out at $115. $59-69 for the singles.) However, all contributions to a 401k are deductible.
So, if you make over $115k (combined with your spouse), then instead of contributing to an IRA, you should max out your 401k first (assuming your investment choices are similar).
What Palacios said is also true–even if your IRA contributions aren’t deductible, then there is still benefit to the tax deferral of the earnings. And the withdrawal of the nondeductible contributions are tax-free, since they are a return of capital–however, you have to be able to prove it to the IRS when you withdraw them.
Right, exactly, however, if you to make contributions to your IRA at some point and they are considered non-deductible because you make too much money and are in another qualified retirment plan, make sure you keep track of them as you don’t want to be taxed on them twice. Greenman is right though, the smart thing to go is max out the 401k first, then make contributions to your IRA.
I would note want to leave my 401K with my former employer as the investment selections are usually limited and just for account management it is easier when rolled over.
BTW–the limits are different whether you are covered under a employer retirement plan.
IF MFJ, phaseout is from 95-115.
If MFJ, "for a non-active participant whose spouse is an active participant [of an employer retirement plan) phaseout is from 178-188.
If single or head of household, phaseout is 59-69.
If MFS, phaseout is from 0-10.
If MFJ, but you live apart from your spouse during the whole year, then you’re not married for purposes of the phaseout.
Capiche?
And people wonder, “Why don’t they test IRA regulations on the exam?”
@Greenman, what are the main differences between 401k and IRA.
Based on this thread, looks like both have tax deferral benefits, however IRA provides additional investment flexibility?
Both are tax deferred accounts, however your 401K is sponsored by your employer and makes contributions to it as an employee benefit. In 2012 you can contribution $17K to the plan and your employer can contribute up to $50K. Contributions to your 401K are pre-tax and reduce your taxable income.
An IRA is an “Individual Retirement Account”, usually set up with a bank or brokerage. You can only contribute $5K per year and if you don’t have another qualified plan (401K or DB plan) you can deduct your contribution, effectively the same thig as your 401K personal contributions which reduces your taxable income. If you are phased out or making deductible contributions, then you can still make contributions, but can’t deduct them on your tax return. They still grow tax deferred and can take that amount out tax free at retirmenet.
Both account grow tax deferred and both are taxed as ordinary income when withdrawals are made during retirement (except for nondeductible contributions made to your IRA).
They really should teach this stuff on the level 3 exam.
Like Palacios says, they’re essentially the same thing, just different names. IRA’s are established at a bank or brokerage house, employers administer 401k accounts. They both have tax deferral and (as already established) some tax deductability.
The reason we say that you have increased investment flexibility in an IRA is because you can invest in almost anything that the bank/brokerage has to offer. You can buy any of their 5000 mutual funds, any of the 5000 stocks in the universe, any of the hundred billion bonds that are out there, UIT’s, ETF’s, etc.
With a 401k, you’re usually limited to a dozen or so mutual funds that the employer offers. Whether that’s really a disadvantage depends on your investment-picking skills.
Palacios, I wonder where you got the notion that an employer can contribute up to $50k. I know they can contribute that much in a SEP-IRA, but I was under the impression that in a 401k, the limit was $17,000 of employee and employer contributions combined.
Most employers don’t based on their matching formula but they can if say it is a profit sharing plan 401K. The Employer is limited to $50K employer contributions and $17K employee deferrals. Here’s what the IRS says:
The annual additions paid to a participant’s account cannot exceed the lesser of:
- 100% of the participant’s compensation or
- $50,000 ($55,500 including catch-up contributions) in 2012 ($51,000, or $56,500 including catch-up contributions, in 2013)
I guess that’s technically true, but I’ve never heard of anybody deferring that in a 401k. I have seen it done in a SEP before.
But I think the total is $51,000 total–that’s all deferrals–employer and employee combined.
(not that anybody on this forum will ever have this problem–this has become strictly an academic discussion at this point)
I stand corrected…
2012 401K CONTRIBUTION LIMITS
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401k Salary Deferral Contribution Limits for 2012
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$17,000 Salary deferral (what you the participant can contribute out of your own salary)
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$5,500 Catch up (additional 401k contributions allowed if you are age 50 or older)
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401k Employer Contribution Limits for 2012
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$33,000 Profit sharing/matching 401k contributions
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401k Total Annual Contribution Limits for 2012 Calendar Year
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$50,000 Total annual 401k contribution limit if you are age 49 or younger
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$55,500 Total annual 401k contribution limit if you are age 50 or older
^ would be nice if my employer would contribute $33k per year to my 401k.