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You Should Find A New Home For An Orphan 401(k)

If you’ve “abandoned” a 401(k) account from a past employer, of course you can still get those funds. But if you continue to ignore the account once your mandatory distributions begin at age 70½, you could lose much of it to IRS penalties. Instead, make the most of this orphan 401(k) plan.

Consider consolidating all of your former employer accounts into a single IRA. A tax-free transfer to a traditional IRA will make your assets easier to manage, and should broaden investment choices and reduce fees. Also, distributions on inherited IRAs can be stretched over a beneficiary’s lifetime, while 401(k) distributions can't.

Alternatively, you might think about converting old accounts to a Roth IRA. You’ll pay income tax on the amount you transfer, but withdrawals during retirement won’t be taxed, and your heirs could enjoy a lifetime of tax-free income from the account.

For now, there’s a catch. You may convert to a Roth only during a year in which your adjusted gross income is $100,000 or less. But that ceiling disappears in 2010, and if you convert a 401(k) or traditional IRA to a Roth IRA that year, you can spread your tax on the conversion over two years.

This article was written by a professional financial journalist for Legend Financial Advisors, Inc.® and is not intended as legal or investment advice.

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