Roll Your 401(k) or Other Employer Plan Oven to an IRA

You don't have to leave your 401(k) or other employer retirement plan money in an existing plan if you no longer work for that employer. The same rule applies to an inherited 401(k) or employer retirement plan. Whether it's your plan or it's inherited, you can legally and advantageously move those funds into an IRA where either you or your financial adviser can invest and manage the money much more effectively with a self-directed IRA from AE-Trust. This is called a "roll over IRA". There are no penalties or taxes to pay for correctly handled roll over accounts. (See the topic below, "Use Trustee to Trustee Transfers".) Here are some of the far more beneficial things you can do with the rollover IRA which you can't do with the employer plan:

Invest the money in non-traditional investments, such as real estate, a private business or private stock or shares (see the "Real Estate IRA" and "Private Placement IRA" black buttons at the top left of this page for more info).

Start taking early withdrawals using the "Early Withdrawal IRA" from AE-Trust (see the "Early IRA Withdrawal" button at the top center of this page for more info).

Invest in far safer, more diverse and/or more profitable investments than the current employer plan offers. See your own investment advisor for planning this, or click on the red link labeled: "Optional IRA Investment Choices", on the upper left side of this page for more info.

Issues With Previous Employer & 401(k) Plans

Once you leave a job you need to decide what to do with your employer retirement plan. You have three choices: (1) Take a lump sum in cash and pay the tax and penalties, (2) leave the money where it is (if the employer plan allows this), or (3) roll the plan over into an IRA.

For most people taking a lump sum or cash withdrawal from the company plan is the worst option due to negative tax consequences:

Your previous employer is required to withhold 20% of any distribution to pay federal taxes.

The cash that you receive will be taxed as ordinary income, the highest tax rates you face.

The 20% that is withheld will be used to pay your federal taxes on the withdrawal. But you may owe still more than the 20% when you prepare your tax return.

You will most likely suffer a 10% penalty of the total amount withdrawn if you are younger than age 55 when you take the cash withdrawal.

Leaving the money with your former employer would be a better choice than taking cash since you will not be penalized or taxed by leaving the money as is. But, many people find that once they leave an employer they have less investment and withdrawal options with their retirement plan, and the plan is more difficult to manage. And generally, loans previously taken from an employer plan are required to be repaid upon termination of your employment and no further loans are available after termination (though loans from a rollover IRA are available).

Most new employers will allow you to do a transfer from a former employer plan into their retirement plan. But you will be limited to a small number of investments, which may be proprietary or may be company stock, and you will still have limited control and options to deal with your funds. Additionally, most of these plans impose lengthy waiting periods during which your money is not earning interest or gains.

IRA Rollover, The Best Choice For Many

For many or most investors an employer plan rollover into an IRA is the best option when you have terminated employment. With a self-directed IRA from AE-Trust, you have much more control over the money and a wide range of investment flexibility. See the bulleted list at the top of this page for just some of the things you can do with rollover IRA money.

An employer retirement plan rollover occurs when you no longer work for an employer and you arrange to transfer or "rollover" your retirement plan (such as a 401(k), 403b or 457) into an IRA. This process is most often referred to as a "401(k) Rollover" or "IRA Rollover". There is no limitation on the dollar amount you can rollover from your previous employer's retirement plan. Most investors rollover their money into a Traditional IRA because there is no tax liability (vs. a Roth IRA which would cause taxation on the rollover money). A Traditional IRA rollover will allow the continued deferral of taxation on the money which is rolled over and deferral on new earnings in the IRA.

The rollover funds can be combined with an existing IRA or put into a separate IRA. If you create a separate IRA for the rollover you can easily move these funds to another employer sponsored plan at some point in the future, assuming that the future employer allows this. If you ever want to move the rollover money to a new employer plan you must keep your rollover IRA separate from any other IRA's you might have, and make no contributions to the rollover IRA (except for other employer plan rollovers). The reason for this is that once you make contributions to a rollover IRA with money that is not from a company sponsored plan, you lose the right to move any of the IRA money to a future company sponsored plan.

The distribution and tax rules for a rollover IRA are the same as the rules for any other Traditional IRA:

Contributions and earnings are taxed at your current brackets when withdrawn after age 59-1/2.

Withdrawals before the age 59-1/2 are taxable and subject to a 10% penalty (with certain exceptions).

IRA withdrawals of a certain minimum yearly amount must begin by the year after you reach age 70-1/2.

Note: Use Trustee to Trustee Transfers. Technically a rollover is created by withdrawing your employer plan retirement funds in cash, then paying those funds to an IRA custodian (such as AE-Trust) within 60 days. But there are numerous pitfalls in handling a rollover like this. It's very easy to break the rollover rules, and that can lead to immediate taxation and 10% penalties on the whole amount of the rollover. The IRS is very unforgiving on most of the rule violations. Further, even if you do a withdrawal which complies with the rules you will still be subject to a 20% IRS withholding tax, even though no tax is owed at that time.

It is by far safer and simpler to do a "trustee to trustee" transfer instead of an actual rollover, and the tax laws are specifically designed to encourage this method. A trustee to trustee transfer arranges for your employer plan money to be transferred directly from the employer plan to your IRA custodian (such as AE-Trust) and into your IRA plan with that custodian. With a trustee to trustee transfer there is virtually no chance for one of the disastrous rule violations to occur. This does require setting up the IRA first. The advantage of this is that AE-Trust will handle the entire transfer for you. You will not have to contact your former employer or the administrator of your employer plan, AE-Trust will do that in your behalf. See the end of this page for a link to the proper trustee to trustee rollover IRA forms.

Important Note - There are two instances where a rollover IRA may not be your best choice:

You may take either lump sum or regular withdrawals from a 401(k) plan at age 55 or older without incurring penalties. You simply pay the taxes on the amounts withdrawn at whatever tax bracket you are in. If you are near or over age 55 and want to take regular withdrawals or some amount of lump sum cash now, you may be better off doing that directly from the employer plan, rather than setting up the rollover IRA. The IRA won't allow penalty free withdrawals until you reach age 59-1/2. However, after age 59-1/2 the IRA will allow equivalent withdrawals to that of the 401(k).

If you have an employer retirement plan held at a former employer, and that plan contains stock of your former employer, you may be better off NOT doing an IRA rollover with the plan, or in not rolling the stock over. An alternate strategy allows you to liquidate the company stock from the plan and receive preferential tax treatment on that liquidation (this is referred to as a "net unrecognized gain" or an NUA strategy). You will lose this preferred treatment on the company stock if you simply roll the stock or the whole plan over to an IRA. For more information on how the NUA strategy will work for your specific situation, contact AE-Trust by clicking on the "Contact Us About an IRA" link in the upper right corner of this page.

To arrange a trustee to trustee transfer from your employer plan, AND where you or your advisor will manage your investments directly from the new IRA:

Click Here for the forms to arrange a transfer from your employers plan.

To arrange a rollover from your employer plan to real estate or non-traditional investment IRA-LLC, where you will have checkbook control of the IRA money through a limited liability company:

Click Here for the forms to rollover real estate or non-traditional investments to IRA-LLC .