401(k) & roth ira

[Guest vinnie2shoes]

5/30/2008

My had to resign from work because of health issues.

She has a 401(k).

What should she do with the money?

vinnie

[WDIK]

Her choice should be based on many factors unknown to those posting on these message boards.

It is generally advisable to carefully review the notices she will receive regarding taxation and rollover options. Her health and age will also be a factor in the decision. Depending on the amount of money involved, consulting with a tax professional may range from prudent to vital.

[GMK]

Some questions you and she might consider:

Can she leave the 401(k) in place or does the 401(k) require her to take a distribution?

Are the investment choices and performance of the 401(k) good enough for her to want to keep the investments there, if that's allowed?

Do you know of a better way to invest the money?

Does she need the money now, or can it stay as a retirement investment?

Answers to questions about the 401(k) may be in the Summary Plan Description. If you can't find your copy, contact the benefits person at her former employer and ask for one. That person should also be able to answer any of your questions about the plan. Find out what your options are before you make a move.

Taxes are an important consideration. If she decides to (or is required to) take the money out of the 401(k), she can avoid paying taxes on it now by having it directly rolled over into an traditional IRA. It could also be rolled over to another employer's qualified plan, but from your post I assume there will not be another employer at this time.

Any amount that could have been rolled over but is instead paid to her is taxable income and is subject to 20% mandatory federal withholding. It may also be subject to an additional 10% "early withdrawal" penalty tax. However, the 10% penalty tax does not apply if she at least age 59-1/2, or if she resigned after she reached age 55, or if she retired due to disability (the 401(k) will have its definition of disability), or if the amount paid to her is less than your deductible medical expenses.

For a rollover to a Roth, the amount rolled over is taxable but not subject to the 10% penalty, no matter what her age is. Be aware that you cannot take a rollover to a Roth if your household income is over $100,000 or if your tax filing status is married filing separately.

And as WDIK points out, contacting a tax professional and an investment advisor is always a good idea.

[John G]

I agree with the above on some issues and the lack of a information base.

You can post again here and add some more detail - ages, significance of these assets vs other retirement assets, what incomes are you relying upon now or in the future, how aggressive or risk averse, tax bracket, state (or state tax rate), level of investing knowledge, estate planning objectives.... there are lots and lots of questions to ask.

The advice you get here is not a substitute for a discussion about your financial situation with a local accountant or financial planner. They should ask a lot of questions and hopefully will be able to tailor their advice to your circumstances.