A reinvestment occurs when funds are transferred from one eligible retirement plan to another, such as from a 401 (k) to an accumulated IRA. Cumulative distributions are reported to the IRS and may be subject to federal income tax withholding. An accumulated IRA is an account that is used to transfer money from old employer-sponsored retirement plans, such as 401 (k) plans, to an IRA. An advantage of reinvesting an IRA is that, when done correctly, the money maintains its tax-deferred status and generates no taxes or penalties for early withdrawal.
A cumulative IRA is a retirement savings instrument that allows you to transfer money from your former employer's retirement plan, such as a 401 (k) plan, to an IRA. When you transfer to an IRA, you can keep your retirement savings tax-advantaged if you follow the rules of the IRA. Nor can you make a transfer during this 1-year period from the IRA to which the distribution was transferred. Most of the pre-retirement payments you receive from a retirement plan or IRA can be “reinvested” by depositing the payment into another retirement plan or IRA within 60 days.
Your third (and often the best) option is to open an accumulated IRA at a brokerage firm and transfer the funds from your old 401 (k) to the account. However, selecting a cumulative IRA provider is essential to keeping fees low and having access to the right investments and resources to manage your savings. Within 60 days of receiving the distribution check, you must deposit the money into a cumulative IRA to avoid current income taxes. You have 60 days from the date you received the distribution of an IRA or retirement plan to transfer it to another plan or IRA.
A traditional (or cumulative) IRA is generally used for pre-tax assets, because the savings will remain invested with deferred taxes and you won't owe any taxes for the actual reinvestment transaction. Many people use cumulative IRAs to consolidate former employers' plans and access a wider range of investment options. This change will not affect your ability to transfer funds from one IRA trustee directly to another, since this type of transfer is not a reinvestment (Tax Resolution 78-406, 1978-2 C. Generally, you establish a cumulative IRA so that you can transfer money from a 401 (k) without paying income tax when you move the money.
If you need cash from reinvestment to pay your tax bill today, a Roth IRA could cause even more tax complications. Cumulative IRAs can also offer a wider range of investment options and low fees, especially compared to 401 (k), which may have a reduced list of investment options and higher administrative fees. The limit will be applied by adding up all of a person's IRAs, including SEP and SIMPLE IRAs, as well as traditional and Roth IRAs, effectively treating them as a single IRA for the purposes of the limit. Therefore, you can contribute additional money to your accumulated IRA the year you open it, up to the allowable contribution limit.
If you choose to transfer your money to an IRA, you'll determine if a traditional IRA or a Roth IRA is right for you. Your choice of cumulative IRA provider isn't the main driver of your portfolio's growth—that's where your investments come into play.