401k Rollover limitations?

[Xian2]

I am retired and 65 and have 401k and TRAD IRA with some basis

I am thinking to take funds out of 401k,  but instead of paying full taxes on it, wonder if I can rollover the amount to my TRAD IRA, then take the withdraw from there and pay a bit less taxes on it this year

1)  Does this work or are there any issues/concerns?

2) I heard about the 1 year rollover rule, will that impact/limit this approach?

3) I also heard about Direct Transfer from 401k to TRAD - what does that mean and is that a better option?

thanks

[Opus 17]

Yes, you can do that, although you will still pay the same income tax in the end, one way or the other.

You can only do one indirect rollover per year from an IRA to another IRA, but there is no limit on the number of rollovers you make from a 401(k) to an IRA.

Anytime you transfer funds between retirement accounts, you have a direct or indirect option. Indirect means that the first fund sends you a check which you then forward to the second fund, possibly with a deposit in your own bank account in the meantime. Indirect rollovers must be completed within 60 days or they don’t count. Indirect rollovers are sometimes subject to withholding, which can create problems— for example, if you withdraw $10,000 and are subject to $1000 of backup withholding, you must deposit $10,000 in the new account within 60 days, so you have to find an extra $1000 dollars someplace.  If you only deposit the $9000 net amount, then you have a $9000 rollover and a $1000 taxable withdrawal.

A direct transfer is performed with the first fund sending the money directly to the second fund, and you never lay hands on it. Direct transfers are not subject to withholding.  Direct transfers are generally preferred because they simplify matters at tax time.

[dmertz]

A distribution paid to you (whether or not it is your intent to roll it over to an IRA) is subject to 20% minimum federal tax withholding (not 10%) on the portion of the distribution that would be taxable if not rolled over.  As Opus 17 said, to complete the rollover of the entire distribution made this way would require you to substitute other funds for the portion withheld for taxes.  You'll then be credited with the tax withholding on your tax return, increasing your refund or reducing your balance due, depending on your other income and tax payments.

Also as Opus 17 said, direct rollovers from the 401(k) are not subject to mandatory tax withholding.  Even though the rollover from the traditional account in your 401(k) to a traditional IRA or from the designated Roth account in the 401(k) to a Roth IRA do not result in taxable income, they are still reportable on your tax return.

[Xian2]

thank you both, definitely want to do direct transfers w/o touching the money... sounds like I can do as many and as often I want from the 401k to TRAD account

I have a bit amount in 401k Roth portion - can I move it over to my regular ROTH ? is there any benefit versus leaving in 401 Roth?

[dmertz]

Yes, the Roth 401(k) is permitted to be rolled over to your Roth IRA.  Again you'll want to do that by direct rollover.  If both are being moved at the same time, make absolutely sure that each rollover ends up in the correct account.

It usually make sense to roll the Roth 401(k) over to a Roth IRA, particularly if the balance in the Roth 401(k) is relatively small.  However, it might make sense to leave it in the Roth 401(k) if that would provide better bankruptcy protection than in the Roth IRA or if your Roth IRA is has not yet met the 5-year holding requirement for qualified distributions.

[Opus 17]

@Xian2 

Again, the difference between leaving the money in the Roth 401k account or moving it to an IRA really depends on your own convenience and the investment choices available.  

Both the Roth 401k account and the Roth IRA account follow the 5 year rule, if you withdraw earnings less than 5 years after the account is open, they are taxable, even if you are over age 59-1/2.  If you don't already have a 5 year old Roth IRA, then I think doing a rollover from the 401k to the IRA will start a new 5 year clock, even if you already met the 5 year clock on the 401k ( @dmertz  will tell me if I am right or wrong).  So, knowing when you might need the money might also influence your decision. 

[dmertz]

"doing a rollover from the 401k to the IRA will start a new 5 year clock, even if you already met the 5 year clock on the 401k "

Correct.  The 5-year clock for the 401(k) does not carry over to the Roth IRA.  The 5-year clock for Roth IRAs starts the beginning of the year for which the individual first makes a Roth IRA contribution (which could be a rollover).  However, if the distribution rolled over from the Roth 401(k) was a qualified distribution from the Roth 401(k), the entire amount rolled over (not just the contribution basis in the Roth 401(k)) becomes contribution basis in the Roth IRA.

[Xian2]

thanks again, I have had a normal ROTH IRA for more than 20 years, and since I am 65, I believe there is no 5 year rule for any new Roth conversions for me, and I think I could withdraw funds directly the next day?

[dmertz]

Your Roth IRAs are qualified and and distributions you take from the IRA are free of tax and penalty.  The distributions are not reportable on Form 8606 or on Form 5329, so the Roth IRA distribution ordering rules no longer have any relevance.

[Vlad_k]

To clarify:

"You can only do one indirect rollover per year from an IRA to another IRA, but there is no limit on the number of INDIRECT rollovers you make from a 401(k) to an IRA."?

Is this correct?

Thanks @Opus 17 

[dmertz]

"there is no limit on the number of INDIRECT rollovers you make from a 401(k) to an IRA."

Correct.