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401(k) to IRA Transfer Considerations

Posted by Keith on May 7, 2007 at 10:48 pm  

I’m planning to transfer my 401k into an IRA. Since I’m 60 years old I believe it’s a no-brainer. Is there anything I should be aware of or could be a problem? I have my wife as the primary beneficiary and my trust as contingent beneficiary. Is this the correct method?

Thanks for your help and enjoy your trip.

Jim


JIM,

Thanks for your question. You are correct that transferring your 401(k) to your IRA is a no-brainer, for several reasons:

If you die while owning an IRA your spouse will be able to continue the IRA for her lifetime. However, if you die holding a 401(k) the proceeds must be distributed within five years of your death.

Also, by placing the 401(k) funds into a self-directed IRA, with the advisor, or through the broker-dealer, of your choice, you will enjoy a much wider range of investment options. As you know, within a 401(k) you are generally limited the the short list of investments usually offered within it.

Naming your spouse as the primary beneficiary makes a lot of sense. However, naming your trust as a contingent beneficiary only works well IF your trust meets several very specific requirements outlined by the IRS. If it fails to meet those requirements, then the proceeds of the 401(k) must be distributed within five years — much like a 401(k). If you are not sure that your trust meets those requirements, then I would consider just naming the kids, in whatever proportion you wish, as the named contingent beneficiaries. Then, if your wife predeceases you, the children will receive their share directly.

Because IRAs and 401(k) pass directly by beneficiary designation, they avoid probate. And that is almost always a good thing.

Hope this helps. Good luck with the transfer, and thanks for following The Global Adventure.

–Keith
From about 700 miles SW of Hawaii

Regarding the transfer of funds, I STRONGLY recommend that you arrange a direct trustee-to-trustee transfer, and that you do NOT accept a check for the 401(k) proceeds. Technically, you have sixty days to get your funds from the 401(k) to your new IRA. However, its always risky to accept the money personally. First, your 401(k) administrator may insist on withholding taxes if you have them write you a check — regardless of your intention to deposit the money in a self-directed IRA. And if the 401(k) administrator does withhold taxes, you must find enough money from another source to fully fund the IRA an amount equal to what was in the 401(k) in the first place.

All this is why I say you are much better off to arrange a trustee to trustee transfer. Your new broker dealer or adviser will be very familiar with the paperwork, and will facilitate the transfer.


Comments

1 Comment so far

  1. Larry Doyle on May 21, 2007 2:17 pm

    After looking through a number of articles on 401k to ira, yours finally had concrete answers for me.

    I am 70 and have a 401k with Fidelity Invest. They suggest I transfer it to a traditional IRA. I was wondering about their motives. Is there any advantage for them or are they really that ultruistic.

    LARRY,

    Yes, good idea. Please see my May 7 IRA to 401(k) Transfer response, below.

    –Keith

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