Retirement Switch: From 401(k) to IRA

Photo: Should we move the 401(k) to an IRA now?

The rules about withdrawing from a 401(k) plan seem fairly straightforward.

You need to wait until age 59½ and retirement before taking money out. Otherwise, you get hit with penalties. Simple, right?

Actually, the rules surrounding 401(k) account withdrawals -- or distributions as the IRS likes to call them -- are not quite as simple as you think.

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Consider these two reader questions received recently.

Q: If I am currently active in a 401(k) at my employer but have another 401(k) being held by an "ex-employer," would I be able to withdraw funds from the (former employer's) 401(k) without penalty -- assuming, of course, I am over 59½? -- R.M., Los Angeles

Q: My husband is 62 and is looking to retire in the next five years. He has a matching (up to 8 percent) 401(k). At present the 401(k) is 60 percent stocks, 40 percent bonds. Should we move the 401(k) to an IRA now? We would continue contributing to the 401(k) until he retires, due to the match, but we are uncomfortable leaving the bulk of our money where it is. -- L.L, Westbrook, Maine

Let's start with the first question.

R.M., the answer is, yes. If you are at least 59½, you can contribute to your current employer's 401(k) plan and at the same time withdraw funds from the second 401(k) account held in your former employer's plan.

In general, once you have left a company, there are few, if any, restrictions on what you can do with money you have accumulated in their 401(k) plan. In most cases, you can take it out, keep it there or roll it over to another 401(k), an IRA or some other retirement plan.

Withdrawals can be taken even if you've moved on to another company, and you're contributing to its 401(k) plan. What happens with one 401(k) account has little to do with the other.

The key issue is whether you will be subject to an early withdrawal penalty. If you're over 59½, there are none under any circumstances. In some cases, you might be able to withdraw penalty free if you're as young as 55 -- or even 50.

Switching to an IRA

For more details on retirement plan withdrawal rules, consult IRS Publication 575 "Pension and Annuity Income."

In your case, R.M., I would just think through what if any benefits there are to withdraw from one 401(k) account and then contribute to another.

It may be a good idea, particularly if you are contributing to the current employer's plan to capture a match offered by the company. However, the tax savings of contributing to the current plan could be negated by withdrawals from the old plan. Also, be careful about allowing the withdrawals from the old plan to push you into a higher tax bracket when combined with your employment income.

Again, I'm not saying don't do it. Just be sure to think through the implications of taking out on one side and contributing on the other.

Now, let's turn to the second question about moving money out of a 401(k) into an IRA.

L.L., I can't say for certain this is the right move for you and your husband. I just don't know enough about your situation to say. However, it's definitely a move worth considering.

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