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Rolling over 401(k)s and IRAs: Everything to know about moving your money

401k to IRA rollover words on the memo stick.
Rolling over your 401(k) to an IRA is common, but also can be tricky. Getty Images/iStockphoto

When it comes to managing your investment accounts, less is usually more. As long as you're making regular contributions, there's rarely any need to fuss with the details.

But there are situations where it's necessary to move your money from one account to another, a process known as "rolling over." We'll explain when you should - and shouldn't - roll over your investment balance, and how it works with each type of account.

Do you know how much money is currently in your retirement investment accounts? If not, you might want to consider linking your accounts and tracking your net worth over time. This online tool can help you stay organized as you manage your money.

What is a 401(k)? 

401(k) is an employer-sponsored retirement plan that is only available to employees of the company offering the plan. Contributions come from your paycheck, and many companies will provide matching contributions. The company will decide the investment options, which can vary wildly depending on the employer. 

There are two types of 401(k)s: Roth and traditional. 

  • Roth 401(k): With a Roth 401(k), you cannot deduct contributions on your taxes, but you will be able to withdraw money tax-free in retirement. 
  • Traditional 401(k): If you have a traditional 401(k), you can deduct contributions on your taxes, but you'll pay taxes on any withdrawals in retirement.

In 2022, the IRs set the maximum 401(k) contribution amount for employees to $20,500, and those 50 or older can contribute an extra $6,500. The limit for combined employee and employer contributions is $61,000 or $67,500 for those 50 or older.

You cannot move an existing sum of money from an IRA into a 401(k). You can only contribute money from your paycheck. A 401(k) is tied to the employer and not the individual, so when you leave the company, you usually have to move the account funds. You can choose to move it to a 401(k) at your new employer or an existing or new IRA. 

What is an IRA?

An Individual Retirement Account (IRA) is a retirement account that you can open by yourself and contribute to with earned money. You can open an IRA by yourself with any investment company you choose - like Fidelity, Charles Schwab or Vanguard. 

Because you can decide where to open an IRA, you have a wider variety of investment options to choose from. In 2022, the maximum contribution limit for IRAs is $6,000 per year with an extra $1,000 annual catch-up amount for those 50 or older.

Like 401(k)s, there are two types of IRAs: Roth and Traditional. 

Traditional IRA

A traditional IRA is like a traditional 401(k) in that you can deduct contributions on your taxes, but you will have to pay taxes on withdrawals later on. Consumers who want to pay fewer taxes may prefer a traditional IRA over a Roth IRA. 

If you have a traditional IRA, you can convert it into a Roth IRA. You will have to pay taxes on it, but doing so will let you withdraw funds tax-free later on. You can withdraw Roth IRA funds and put them in a traditional IRA, but there is no direct way to convert a Roth IRA into a traditional IRA - and you probably wouldn't want to anyway.

"I can't think of a reason why you would ever want to do it," said financial planner Brent Perry of Piedmont Financial Advisors. "You'd change tax-free money into tax-deferred money, which is not good."

Roth IRA

To qualify for a Roth IRA, your adjusted gross income (AGI) must meet the following IRS guidelines.

Federal income tax filing status Contributions are reduced starting at a modified adjusted gross income (AGI) of... Contributions end at a modified adjusted gross (AGI) income of...
Married filing jointly or qualifying widow(er) $204,000 $214,000 or more
Single, head of household, or married filing separately (if you didn't live with your spouse at all in 2022) $129,000 $144,000 or more
Married filing separately (if you lived with your spouse at any point in 2022) $0 $10,000 or more

A Roth IRA does not provide any immediate tax benefits, but you will be able to withdraw money tax-free in retirement.

You can move a Roth 401(k) into a Roth IRA. You can also move a traditional 401(k) into a Roth IRA, but you will have to pay income taxes on the amount. 

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