If you've started a new job and you can no longer contribute to the 401k plan offered by your former employer, there is still a way you can make that money continue to grow. One solution is an individual retirement account (IRA) rollover, in which you move your retirement savings from your 401k plan into an individual retirement account. By doing this you won't have to pay taxes in such a move. When you contribute to your newly rolled over IRA, you may also be eligible for tax deductions.
When you move on to a new job, the ideal action is to transfer the money that you accumulated in your old employer's 401k plan into the one offered by your new company. Often, though, your new company won't allow this. If this is the case, you can also often elect to leave your money in your former employer's retirement plan. Unfortunately, you won't be able to make new contributions if you take this route. This leaves one other option: You can roll your retirement money over into a new IRA.
The Rollover Option
The rollover option makes sense if you want to continue contributing money to your previous retirement account. If you want to do this, then a rollover to a traditional IRA is an ideal move because you won't suffer any tax penalties. However, you also won't receive a tax deduction for the money that you roll over from your retirement plan to an IRA. IRA tax deductions are reserved for any new contributions that you make to your IRA during the year.
Reporting the Move
Just because you won't be taxed on your rollover doesn't mean that you don't have to report the move to the IRS. To do this, you will fill out two tax forms -- Form 1099R, which states that you took a distribution from your former employer's retirement plan, and Form 5498 , which states that you completed a rollover contribution to your IRA.
Tax Deduction Rules
Once you've rolled your retirement plan funds into an IRA, you can follow the standard tax deduction rules spelled out by the IRS. In general, If you are under 50, you can contribute up to $5,000 in tax-deductible dollars to an IRA. If you're 50 or older, you can make tax deductible contributions of up to $6,000.