The Economic Growth and Tax Relief Reconciliation
Act of 2001 included provisions that should simplify many investors' retirement
accounts, and possibly decrease the number of separate accounts needed.
What
Was the Old Rule?
Based on the old rules, if an employee leaves a job
in which he has made 401(k) or 403(b) contributions, the employee could roll the
funds over to an IRA Rollover (IRA/RO) account after he or she terminates employment.
Most financial advisers, including our firm, previously recommended keeping rollover
funds in a separate account if the person believes they may wish to roll the funds
into another retirement plan at some point in the future. Based on the old law,
if IRA/RO funds were commingled with traditional IRA funds, they could not be
rolled into another qualified plan.
What
Is the New (as of January 1, 2002) Rule?
Beginning in January 2002, distributions
from an IRA account may be rolled over to a qualified plan, tax-sheltered annuity
or deferred compensation plan to the extent the amount received is includible
in income. This means that after-tax contributions to IRA accounts cannot be rolled
over to those types of plans. It no longer matters whether the rollover is coming
from an IRA or an IRA/RO. This also means that IRA and IRA/RO funds can be commingled
after January 1, 2002.
Who Is Affected
by This Rule Change?
If you have left a previous job, rolled 401(k) or
403(b) funds into an IRA/RO account, but kept that account separate from your
traditional IRA account, you are affected. Why? This affects you because you no
longer need two separate accounts for traditional IRA and IRA/RO funds. Most of
us like to have as few accounts as possible, as it decreases the amount of mail
received and may even cut down on trading costs. Trading costs may drop because
with fewer accounts, fewer separate trades are necessary.
What
About After-Tax Contributions?
After-tax contributions to 401(k) and
403(b) plans can be rolled over into IRA accounts. These contributions are treated
thereafter as after-tax contributions in an IRA account. However, after-tax traditional
IRA contributions cannot be rolled over into 401(k) or 403(b) plans.
What
About SIMPLE IRAs?
Amounts distributed from SIMPLE IRAs can be rolled
over to a traditional IRA once the employee has participated in the SIMPLE plan
for two years. Until two years have passed, SIMPLE IRA distributions can only
be rolled over into other SIMPLE IRAs.
What
About Roth IRAs?
Roth IRAs are not affected in any way by these changes.
Bottom Line:
Although the
rules are not as simple as they could be, these changes should eliminate the need,
in most cases, to keep IRA Rollover and traditional IRA accounts separate. These
rules took effect on January 1, 2002, allowing investors to combine IRA and IRA/RO
accounts. For more information regarding this topic, please contact The Henssler Financial Group at 770-429-9166 or comments@henssler.com.
