If you have an old 401(k) plan at work, you may decide to transfer it to an individual retirement account (IRA). But does a 401(k) plan reinvestment count as a contribution to the IRA? The good news is that transferring money from a 401(k) to an IRA isn't included in the annual contribution limit. However, it may affect your ability to make a contribution for the current year. A financial advisor could help you create a retirement plan for your financial needs and goals. If you have a traditional 401(k) or 403(b), you can transfer your money to a Roth IRA.
However, this would be considered a conversion to Roth, so you would have to declare the money as income when you pay your tax return and pay ordinary income tax on income. There are two ways to transfer your Roth 401(k) to a different account and comply with the five-year rule. The first is to transfer Roth 401(k) funds to an existing Roth IRA. The accumulated funds will be counted to calculate the time elapsed since the opening of the Roth IRA.
The second way is to transfer your current Roth 401(k) to a new Roth 401(k) with your new employer. In this case, the time you spent the money on the first account counts in the total count. The one-year renewal rule of Section 408(d)(B) of the Internal Revenue Code applies only to reinvestments.You can also decide to reinvest your old retirement accounts if you simply prefer to have all your savings in one place. If an employee were to make only a partial transfer to the new Roth 401(k), the five-year period would begin again.
With a reinvestment, your money goes from one retirement plan to another (401k to IRA and vice versa, for example). Because your original contributions were tax-deferred, you'll have to pay Uncle Sam's income tax in order to keep that money in a tax-free Roth account. If you want to consider a 401(k) plan reinvestment that doesn't affect IRA contributions, Capitalize can help. The proposed Treasury Regulation Section 1.408-4(b)(ii), published in 1981, and IRS publication 590-A, Contributions to Individual Retirement Agreements (IRAs) interpreted this limitation to apply IRAs by IRA, meaning that a transfer from one IRA to another would not affect a renewal involving other IRAs of the same person. Also note that, generally, the reinvestment must be complete so that new funds can enjoy the remainder of the time period of the old Roth 401(k).
Nor can you make a transfer during this 1-year period from the IRA to which the distribution was transferred. Reinvestment can only happen after you've contributed money to one of your retirement plans and never before a contribution. Funds from a Roth 401(k) account transferred to another similar account are subject to favorable treatment over the five-year holding period. The main difference between a reinvestment and an asset transfer is where the money is kept before it is transferred to Vanguard. There are additional considerations if you plan to transfer a 401(k) account from a pre-tax account to an after-tax Roth IRA. Just remember that once you add money to your accumulated IRA, you may not be able to transfer the account to a future employer's plan.
If a plan pays you an eligible cumulative distribution, you have 60 days from the date you received it to transfer it to another eligible retirement plan. If you have questions about how transferring your 401(k) plan to a Roth IRA might affect contributions, it's best to consult a tax professional.
