when the Bush tax cut became law, most folks were too busy salivating over their rebate checks to pay much attention to other changes in the tax code. In fact, most peoplestill>
haven't gotten the word that the rules regarding tax-free retirement-account rollovers have become more lenient. These new rules are intended to make your retirement-account money more portable as you move from one job to the next. (Finally, even the government recognizes that the odds are pretty low that you'll work for the same employer until retirement.)
For a general review of how to roll over retirement accounts, see our story
New Treatment for After-Tax Contributions
These days, roughly 50% of 401(k) plans allow employees to make after-tax contributions, according to the latest survey by benefits consultant Hewitt Associates. After you've contributed the maximum tax-deferred amount, you can then make after-tax contributions to your account. Even though you have to pay taxes on these contributions, it's still worthwhile, since your contributions then grow tax-deferred.
And the good news is that the rules regarding after-tax contributions are now significantly improved. Say you participate in your employer's qualified retirement plan (401(k), profit-sharing, etc.) and make after-tax contributions to your account. Before 2002, when you left your job, you weren't allowed to roll over your after-tax contributions into an IRA. In other words, when you received your retirement-account money after changing jobs or retiring, you were forced to hold the after-tax contribution dollars in a taxable investment account (assuming you saved the money instead of spending it). As a result, you permanently lost your tax-deferral advantage for subsequent earnings and gains generated by those dollars.
Fortunately, this taxpayer-unfriendly outcome was corrected by the new and improved rollover rules. You now can> roll over your after-tax contribution dollars into an IRA and therefore continue letting that money grow tax-deferred.
You might as well know that under the new rules, you can also roll over after-tax contributions from your former employer's plan into your new employer's defined contribution plan (401(k) plan, profit-sharing plan, etc). To do so, the new plan must agree to accept the after-tax contributions and separately track them on your behalf. Before 2002, a qualified plan couldn't accept rollovers of after-tax contributions previously made to another plan.
But just because these rollovers into 401(k)s are now allowed, that doesn't make them a great idea. Instead, I recommend rolling over all the money (both your before- and after-tax contributions) from your old employer's plan into an IRA. That way, you have full control over the money while preserving your tax-deferral advantage. If you instead roll money over into your new employer's plan, you'll be limited to the investment options offered by that plan. Plus the plan's terms will restrict access to your money. You avoid both of these negatives with a rollover IRA. (The exception is if you have highly appreciated stock click here
Before 2002, you could roll over money from an IRA into an employer-sponsored qualified retirement plan only if the IRA in question was a "conduit IRA." A conduit IRA is an account that contains only funds previously rolled over from another employer-sponsored qualified plan account (typically from an earlier job).
But under the new rules, you can now generally roll over any "eligible rollover distribution" from an IRA (conduit or otherwise) into your new employer's qualified retirement plan account (assuming the plan permits IRA rollovers). Translation? You can now roll over anything except> after-tax contributions, which can either come in the form of nondeductible contributions made to the IRA itself or via after-tax contributions made to an employer-sponsored retirement account that was then rolled over into an IRA. (Yes, this is all absurdly complicated, but to sum this up, under the new rules you can now roll over your after-tax 401(k) contributions either into your new employer's 401(k), or in an IRA but once you move the funds into an IRA, you then can't> move them into a 401(k). Got it?)
While this new rule adds an element of flexibility, I'm against making IRA-to-employer-plan rollovers for the same reasons explained above. In fact, the only reason I can see to roll over money from an IRA into an employer plan is to consolidate all your tax-deferred retirement dollars in one place. This could make tracking your money a bit more convenient, but in my opinion, the drawbacks far outweigh this minor benefit.