Can I Rollover a 401k and Still Put in $5,000 Dollars for the Year?
- When you contribute to a 401k your account is tax deferred. This means you do not pay taxes until you withdraw money from your account. If you take an early distribution before age 59 1/2, you are subject to a 10 percent penalty in addition to taxes. You are not required to take distributions and pay taxes until after you are age 70 1/2. To maintain the tax advantage and avoid a penalty, you can deposit a 401k distribution into an IRA or another 401k. This is allowed as long as the distribution is not a required distribution taken at age 70 1/2. This process is known as a rollover.
- Certain events allow you to take distributions from your 401k. In general, most distributions eligible for rollover involve a separation in service from your employer. The separation can be because of retirement or for any other reason. There is an exception for employees 59 1/2 or older. When you reach this age, you can begin to take in-service withdrawals from your 401k without the penalty. These distributions would be eligible for rollover, as well.
- There are two rules that determine your eligibility to contribute to an IRA. First, you must have earned income. Income may be derived from a variety of sources including your salary, bonus or commissions. There is no minimum age requirement. For example a teen with part-time babysitting income would qualify. The maximum age limit for contributions to a traditional IRA is age 70 1/2. You cannot contribute in the calendar year you reach the maximum age limit. However, Roth IRA accounts do not have any age restrictions for contributions.
- Rollovers of 401k accounts do not have a maximum dollar limit. You may rollover a 401k of any size to an IRA. Your rollover will not affect your ability to make annual contributions. As of the date of this publication, the annual limit for IRA accounts is $5,000. If you are age 50 or over, you can contribute an extra $1,000 for a total of $6,000. If your annual income is less than the limit, you may contribute up to the amount of your earnings. For example, a part-timer with an annual income of $3,000 can only contribute $3,000 to an IRA.