Q. My daughter worked for a company with a 401(k) plan. After she left the company, the money was transferred to an IRA. Does this money count towards the maximum amount she can contribute to a Roth IRA?
— Mom
A. Let’s go over the basics.
When someone leaves an employer, there are four options for the 401(k) money.
If you like your old 401(k) plan, you can leave the money there, said Deva Panambur, a fee-only planner with Sarsi, LLC in West New York and an adjunct professor of personal finance at Montclair State University.
If the new company’s plan allows it and you like the new 401(k) plan, you can transfer the funds to the new plan, he said.
You can also roll over the funds to a rollover IRA.
“If the rollover is a trustee-to-trustee transfer or the rollover occurs within 60 days, there is no tax impact,” he said. “The benefit of rolling the money into an IRA is that it gives you a wider range of investment options and flexibility.”
If the 401(k) has after-tax money in it — meaning if it was a Roth 401(k) — you can roll it over to a Roth IRA.
“The fourth option, which is not usually recommended, is that you can withdraw the money from the 401(k),” Panambur said. “If you are under 59.5 years of age, you could owe a 10% penalty over and above the income tax on the withdrawal.”
Your eligibility to contribute to an IRA depends on your filing status and modified adjusted gross income (MAGI).
“If your filing status is single, then in 2021 you can contribute the maximum amount to a Roth IRA if your income is less than $125,000, or $198,000 for married filing jointly and $10,000 for married filing separately,” he said. “The maximum amount that can be contributed to a Roth IRA in 2021 is $6,000 for people under the age of 50 and $7,000 for people over the age of 50.”
You can contribute a partial amount if your income is too high.
Single tax filers can contribute less than the maximum allowable amount if their income is over $125,000 but less than $140,000, while the cutoff is $208,000 for those who are married filing jointly.
“Specific to your question, the amount rolled over from the 401(k) to an IRA has no impact on the eligibility to contribute to a Roth IRA,” he said.