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.

Previously, there was a catch. You could convert to a Roth only during a year in which your adjusted gross income was $100,000 or less. But that ceiling disappears, beginning in 2010. And, for conversions occurring in 2010, you could choose to spread your tax on the conversion over two years.


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