401(k) rollover for a young investor

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Q. Even though I’m only 30, I think about retirement. I have a Roth IRA which I contribute to monthly as well as my 401(k) plan. I also have a 401(k) plan from a previous company that I would like to roll over to a traditional IRA. Are there any taxes or penalties for rolling it over? If not, would contributing to this traditional IRA bump me into a different tax bracket?
— Young but investing

A. These are all great questions, and we think you’ll be happy with the answers.

First, rolling over an old 401(k) plan to a traditional IRA, if done properly, will be tax free, said Howard Hook, a certified financial planner and certified public accountant with EKS Associates in Princeton.

Hook said there should not be any penalties, but you should check with the administrator of the old plan to see if there are any fees for doing so.

When you make the move, you want the 401(k) plan to be directly rolled over to your IRA, Hook said, so you’ll never take possession of the money. Many custodians now allow for electronic rollovers, meaning the funds are directly sent to the IRA custodian, which Hook says is great.

If that is not possible, then you should be sure that the 401(k) plan administrator makes the rollover check payable to the IRA custodian for your benefit and not in your name, Hook said.

It would look something like: [Custodian’s Name][/Custodian’s] IRA F/B/O [Participant’s Name][/Participant’s].

No tax should be withheld on the rollover, Hook said. If the check is mailed, it would go to your home address and then you can deposit the check into the IRA account.

Now about your tax bracket.

Hook said contributing to a traditional IRA may lower your tax bracket, not raise it.

“IRA contributions are fully tax deductible to taxpayers who are not covered by a retirement plan at work — for married taxpayers, both spouses must not be eligible for a plan at work,” Hook said. “If you or your spouse are covered by a plan at work, an IRA contribution may still be tax deductible if your adjusted gross income is below a certain threshold.”

All is not lost, however, if you are not eligible to take a full tax deduction for your IRA contribution.

“You may be able to make a Roth IRA contribution for the amount not tax deductible,” he said. “While not getting a tax deduction for the contribution, monies contributed to a Roth IRA grow tax deferred , and if held for at least five years and upon reaching age 59 1/2, all distributions are tax free.”

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NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.