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At most U.S. corporations, defined-contribution pension plans have largely replaced the traditional defined-benefit pension plans. Defined-benefit plans define the actual benefit you receive and pay out a specific dollar amount per month in retirement. Defined-contribution plans define the actual contribution you make and your employer. The amount paid out in retirement depends on how much you invested and how well your investment performed over time. Although some employees crave the traditional pension plans of the past, defined contribution plans offer some significant benefits, including the ability to roll the money into an individual retirement account.
Most large corporate and government employer plans are governed by the Employee Retirement Income Security Act, or ERISA. ERISA-covered defined-contribution plans include 401(k)s, 403(b)s and 457(b)s. Smaller companies provide plans governed by Internal Revenue Service statutes. These plans include Keoghs, Simplified Employee Plans, or SEP-IRAs, and Savings Incentive Match Plan for Employees, or SIMPLE, IRAs. Most of the ERISA plans allow you to contribute pre-tax funds, reducing your income and, therefore, your taxes. All the plans provide tax-deferred savings until the time of withdrawal.
One key benefit of defined-contribution plans is portability. This means when you retire or resign from employment with your current company, you can transfer your assets to a new employer’s plan. Or you can transfer those assets to an IRA. The IRS definition of a roll over is a “tax-free distribution to you of cash or other assets from one retirement plan that you contribute to another retirement plan.”
Rollover Contribution Limit
All ERISA-qualified defined-contribution plans are eligible to roll over into an IRA. No contribution limits exist on the amounts rolled over from a qualified ERISA defined-contribution plan to an IRA. You can roll over all or a portion of the assets in your account. For example, if your 403(b) has $2.5 million in assets, you can roll over the entire $2.5 million into your IRA. Alternatively, you can roll over $1.5 million to your IRA and retain the remaining $1 million in your 403(b) account.
The Pension Protection Act allows you to roll over assets from different plans into the same IRA. However, if you wish to transfer out your retirement assets from your IRA when you join another company, it may be best not to commingle funds from two different plan types. This means it may be best to have a separate IRA for 403(b) rollovers and a separate one for 401(k) rollovers.
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