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Moving an old 401(k)

Dr. Don TaylorDear Dr. Don,
I've got about $30,000 sitting in an old 401(k) account from an old job I quit several years ago to become a stay-at-home dad. I want to get this money out and put it somewhere where I can continue to add money monthly (my wife works full time). What is my best option? Thanks for any help! -- Tony Traverse

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Dear Tony,
Moving the money out of the 401(k) account is easy; just open an IRA Rollover Account and transfer the money. A direct transfer from your 401(k) account to the IRA Account is preferable because if the check is made out to you, the distribution is subject to mandatory withholding and you'll have to scramble to replace the 20 percent ($6,000) withheld so you can fully fund the IRA Rollover Account and then wait until you file this year's tax return to get the money back.

If the 401(k) account holds shares of company stock, you should talk to your tax adviser about whether the IRA Rollover is the right move for you. It may be better to have those shares delivered into a taxable brokerage account.

Though current tax law allows new contributions to an IRA account to be commingled with IRA Rollover monies, I'd keep the accounts separate unless the cost savings from commingling the funds makes it worthwhile. By doing so, you preserve the ability to move the IRA Rollover account into a new employer's 401(k) plan.

If your wife is covered by an employer plan at work, your ability to contribute to a spousal IRA may be limited. IRS Publication 590, Individual Retirement Arrangements (IRAs), has more details. Otherwise an automatic investment plan (AIP) with an IRA account provider will allow you to add money to the account monthly. I'd suggest opening an account directly with a no-load mutual fund family to hold down fees and expenses in this account.

Figure out where you want to invest the Rollover IRA account, and then work with that account provider to do a direct transfer from your 401(k) account into the rollover account.

-- Posted: March 21, 2005




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