retirement

Retiree looks to move 401(k) money to IRA

Don TaylorDear Retirement Adviser,
Two years ago, I retired at age 55 after working for my employer for 38 years. I'm wondering whether I can roll my 401(k) money into an individual retirement account without incurring the 10 percent penalty. If not, I have heard that I can withdraw the money from my 401(k) in five equal installments. Is that true?

Thanks,
-- Connie Conundrum

Dear Connie,
Congratulations on your early retirement!

Before you decide what to do with your 401(k) plan funds, you need to determine your goal in moving the funds. Are you trying to take distributions while avoiding the 10 percent penalty for early withdrawal? Or, do you want the money to increase investment options and control of the account?

Your 401(k) plan may give you the option to withdraw funds without penalty between age 55 and 59 ½.

You can roll your 401(k) balance into an individual retirement account without penalty and continue to defer taxes on the money. You might be able to save on taxes by transferring the company stock into a taxable account while simultaneously rolling over the other funds into the IRA.

You could also decide to take the tax hit now and roll the noncompany stock funds from the account into a Roth IRA, making later distributions tax-free once the five-year seasoning requirement on the account has been met.

The other alternative you're considering is a called a 72(t) distribution. It allows you to make substantially equal periodic payments out of the account based on your life expectancy without paying the 10 percent penalty tax on early distributions.

These payments must continue for at least five years, or until age 59 ½, whichever is longer. If you are 57 years old, the payments would have to continue at least until age 62.

If you don't follow the rules, however, you could owe the 10 percent penalty tax, plus interest, on all the 72(t) distributions.

Bankrate has a 72(t) calculator that will allow you to estimate the annual distribution you can take from the account without triggering the penalty tax. I recommend working with a tax professional to determine the allowable periodic distributions.

Get more news, money-saving tips and expert advice by signing up for a free Bankrate newsletter.

Ask the adviser

To ask a question of the Retirement Adviser, go to the "Ask the Experts" page and select "Retirement" as the topic. Read more Retirement Adviser columns and more stories about retirement.

Bankrate's content, including the guidance of its advice-and-expert columns and this website, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation. Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy. Please remember that your use of this website is governed by Bankrate's Terms of Use.

advertisement

Show Bankrate's community sharing policy
          Connect with us
MORTGAGE HOME EQUITY AUTO CDs CREDIT CARDS
Product Rate Change Last week
30 year fixed 4.12%  0.06 4.18%
15 year fixed 3.25%  0.04 3.21%
5/1 ARM 3.48%  0.16 3.32%
 
View Rates in your area Next
Product Rate Change Last week
30K FICO-based HELOC 4.30%  0.01 4.29%
50K FICO-based HELOC 4.06%  0.02 4.04%
100K FICO-based HELOC 3.91%  0.02 3.89%
 
View Rates in your area Next
Product Rate Change Last week
60 month used car loan 2.79% --0.00 2.79%
48 month used car loan 2.99% --0.00 2.99%
60 month new car loan 3.23%  0.01 3.24%
 
View Rates in your area Next
Product Rate Change Last week
1 Year CD 0.97% --0.00 0.97%
2 Year CD 1.18%  0.01 1.17%
5 Year CD 1.81%  0.05 1.76%
 
View Rates in your area Next
Product Rate Change Last week
Balance Transfer Cards 15.75% --0.00 15.75%
Cash Back Cards 16.45% --0.00 16.45%
Low Interest Cards 10.96% --0.00 10.96%
 
Next
advertisement
CD & INVESTING NEWSLETTER

Learn the latest trends that will help grow your portfolio, plus tips on investing strategies. Delivered weekly.

Blog

Jennie Phipps

2015 COLA looks chintzy

It looks like the 2015 COLA will be about 1.7 percent -- bad news for Social Security recipients hoping for more.  ... Read more

advertisement
Partner Center
advertisement

Connect with us