- Can I Deposit to a Rollover IRA Acccount?
- How to Roll Over Traditional IRA to 401(k) Without Tax Penalties
- Can Money Be Added to an Existing Roth IRA Account?
- Can I Shift After-Tax Funds From My 401(k) to a Roth IRA?
- How to Report the Rollover of a 401(k) to a Traditional IRA on a 1040
- Can You Take Monthly Distributions From a Rollover IRA?
When you leave your job, you get to take some or all of your 401(k) with you. If you deposit it in a bank, you pay tax on everything you withdrew. There's no tax, however, if you roll the money over to a traditional IRA. After the rollover, you can make regular contributions to the IRA as well, but that may be a mistake.
Commingling regular IRA contributions with rollover money is perfectly legal, but it has some drawbacks. If you keep your rollover confined to its own IRA, and then later you sign up for a 401(k) at a new employer, you can roll over the IRA to the new 401(k). If you add regular contributions to the rollover account, though, you sacrifice that option.
Rollover IRAs that hold 401(k) money are also called conduit IRAs because they can channel money from one 401(k) to another. There are no limits to moving the money out: you can do it the week after you leave your old job, or 20 years later. You are not required to commit to using the IRA as a conduit account. If you decide two years later that you're never going to roll the account into a new 401(k), you can start contributing to it instead.
One big difference between 401(k) and IRA accounts is that the workplace plan is protected from your creditors by the Employee Retirement Income Security Act. Even if you file bankruptcy, your 401(k) is off-limits. As of 2013, IRAs are only shielded to around $1.17 million in bankruptcy, and they aren't protected from lawsuits and other financial threats. ERISA protects your 401(k) rollover from creditors, but only if the money is kept separate. Commingle it with regular contributions, and you only have regular IRA protection.
Before you roll over any money, ask yourself if that's the best move for you. With an IRA, you usually have a greater array of investment choices than with a 401(k). That's great if you're good at investing, but if you'd rather just sit and let the account work, a 401(k) demands less attention. If your 401(k) investments are doing well and the plan lets you keep the money there, there's no need to rock the boat.
- Wells Fargo: 401k / IRA Rollover FAQs and Answers - Wells Fargo Retirement
- Charles Schwab: Rollover IRA FAQs
- The Pension Specialists: Conduit IRAs?
- Nolo: Your Retirement Plan in Bankruptcy
- TIAA-Cref: Bankruptcy Protection for Retirement Plans and IRAs
- Forbes: 8 Points To Consider Before Rolling Over A 401(k) To An IRA