We are always asking for questions from our School of Tax Strategy students. Recently, we were asked the following question:
Q: "Hi Tom, If a person has a 401k still with a prior employer's plan, is it best to move that money into an IRA or something else? Anything that that person needs to keep in mind to ensure it's not a taxable event? Thank you!"
A: Here are a couple of quick tips to make this easy for you.
1. Ask yourself if you are happy with the amount of money the investment is earning in your 401(k). If the answer is yes, leave it there. If the answer is no, move it into a self-directed IRA.
2. To make sure the rollover from the 401(k) to the IRA is not taxable, do a "trustee to trustee" transfer. This means that you tell your former employer to directly transfer the investments in the 401(k) to your IRA.
3. If your former employer makes a mistake and writes you a check instead, it's okay. Just be sure to put the entire amount back into your self-directed IRA within 60 days.
Caution: If your former employer withheld taxes when they wrote you the check from your 401(k), you have to write your own check in the amount of the taxes to your IRA. The withholding is treated as a distribution to you, so you have to put that amount back into your IRA as well. You will get back from the IRS when you file your tax return.
Set up your self-directed IRA with a good trustee. We recommend both Sterling Trust in Texas and Entrust (offices around the country). For more information, visit Wealth Strategy U. It's FREE at http://www.provisionwealth.com/wealthstrategyu
Warmest regards,
Tom