Expert Q&A Archive
How can I contribute to a 401k from a previous job?
I have a 401k from my previous job. I resigned from that job, and I am now working as a temp or contractor for another job. I would like to start contributing to my 401k again. I am not sure, but I believe I have to rollover my 401k into a Traditional IRA or Roth IRA. If so, what is the difference between a Roth IRA and a Traditional IRA? Also, how would I go about rolling over my 401k, so I can start making contributions again? Thank you for answering my question.
Rosemary Ervin, CPA:
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The 401(k) is established by the employer. Unless your current employer has a 401(k) with a rollover provision (whereby you can roll your previous employer's balance into the new employer's plan), your options are to leave the balance with the previous employer until you have an employer with a plan, or roll the 401(k) into an IRA.
IRAs have lower contribution limits based on your age --- $4,000 ($5,000 if you are over the age of 49). Once you roll the 401(k) over into an IRA, you cannot roll it back to a new employer's 401(k). By contrast, you can establish and contribute to an IRA any time you have earnings. When you contribute to a traditional IRA, your contribution may be deductible from your taxable income if your income and filing status meet certain levels. Otherwise, the contribution may not be deductible.
The difference between a Roth IRA and a traditional IRA is that the Roth is always funded with after-tax dollars. You do not get a current deduction for the contribution; however, when you withdraw from the Roth, all contributions and earnings are tax free. Go to http://www.irs.gov/faqs/faq17.html
and look at subquestions 17.3 and 17.4 for an explanation for Traditional vs Roth contributions.
Sharon P. Hardy, CFE:
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First, let me start off by providing some basic information about IRAs that I googled and subsequently pulled off of the website. The source of the background in was "Investopedia (a Forbes Digital Company)".
"With the exception of Roth IRAs, where eligible distributions are tax-free, eventual withdrawal for an IRA is taxed as income, including capital gains."
The questions, as they pertain to what can the person do now with her 401K from her previous job, are really dependent on answers to the factors listed below.
The provisions that are stated in the previous employer's 401k plan (e.g. whether the monies in the plan could remain in the plan after the person terminated employment, etc.). If the current employer has a 401k plan, do the plan's provisions allow for rollover of cash or assets from another employer's plan into it? If so, this would provide for a seamless transparency in the overall process, as well as allow the person to contribute to the plan, without having to miss a beat.
If the answers to the questions above do not allow for a seamless rollover, I believe the next best option would be to the put the monies that were invested in the previous 401k into an IRA (preferably in a Roth, if all eligibility requirements can be met).
Michael A. Masiello:
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Yes, you are correct. You should roll over your 401k into an IRA. The main difference between Roth and [traditional] IRAs is taxation. With a Roth you pay taxes on contributions, but never pay taxes again. Assuming withdrawal after [age] 59 1/2, the growth is tax free. With a Regular IRA you deduct the contributions now, but will pay taxes when you take the money out. Strategy idea: if you are in a low [tax] bracket today, you may be better off with the Roth. You cannot contribute to the old 401k; only if the new employer offers a 401k plan can you contribute. That said, you should contribute to a Roth or Regular IRA for this year.
Lynn Anne Gillen, CIMAź :
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You should roll over your 401k into a Traditional IRA, not a Roth IRA. You have not paid income tax on the funds inside the 401k. By transferring it to a Traditional IRA, the funds maintain the same tax status. When you retire and withdraw funds from your Traditional IRA, then you will pay income taxes.
To start the rollover process, ask friends for recommendations to a financial advisor, or if you want to do it yourself, research some of the large mutual fund companies online. Once you have decided on where you will have your Traditional IRA, then call your old company to see what paperwork they require to process the rollover.
To continue contributing to a retirement plan look to see if you are eligible for a Roth IRA. This is after-tax money you add to the account. When you retire and start to withdraw funds, the earnings are not taxed on this account. If you are young and your income is within the limits for a Roth, it is a great place to save money until you have access to a 401k again.
A good source of information on using employer-based
retirement plans and what to do if you can't join an employer-based plan
is the Employee Benefits Security Administration's publication "Savings
Fitness: A Guide To Your Money and Your Financial Future." On page 22
that publication alludes to a study by the Employee Benefit Research
Institute and Hewitt Associates which found that only 40 percent of
workers changing jobs rolled over into an IRA or a new employer's
retirement plan the money they received from their former employer's