401(k) Rollover

401k Orlando

To Roll or Not to Roll

If you are changing your job, you may be wondering what to do with your employer sponsored retirement plan, such as 401(k), 403(b), and 457 accounts.  It is important to understand your options. View this two minute video to learn more.

Here are a few of the questions you should ask:

What will I be entitled to?  You are entitled to a distribution of your vested balance, which includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts.  It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

Why shouldn’t I just withdraw my money from the 401(k)?  While the pool of dollars may look attractive, don’t spend it unless you absolutely need to.  If you take a distribution the entire value of your account, less any after-tax or Roth 401(k) contributions you’ve made, will be added to your taxable income for the year and taxed at ordinary income tax rates.  And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout.  Let’s assume your income is $75,000/year and your 401(k) value is $125,000.  If you were to take a full distribution of $125,000, you’d have to report income of $200,000 to the IRS on your tax return.  This could affect many things from financial aid to Medicare premiums, not to mention the $70,000 in taxes you’d have to pay (assuming a 35% tax bracket).

Can I just leave the money in the 401(k)?  Yes, if your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age.  But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan.

What happens if I received a check and have changed my mind?  Your employer will withhold 20% for tax purposes, but you have 60 days to roll your money into another retirement account, such as an IRA or your new employer’s 401(k).  Of course, if you don’t roll it in that period of time, you will be responsible for taxes and penalties as described above.  You will also be taxed on the 20% that was withheld by your former employer.

Why would I roll it into an IRA?  You generally have more investment choices than an employer’s 401(k) plan.  You typically can freely move your money around to the various investments offered by your IRA trustee/custodian, and you may divide up your balance among as many of those investments as you want.  You can also allocate your IRA dollars among different IRA trustees/custodians.  An IRA may give you more flexibility with distributions, such as timing and amount.  A 401(k) usually does not offer these options.

Why would I roll it into my new employer’s 401(k)?  Fees and expenses vary between 401(k) plans as well as between retail accounts.  You should compare your investment options agains the cost of such options.  Many employer-sponsored plans have loan provisions.  You cannot borrow from an IRA.  You can, however, take a short term loan from an IRA as long as you return the money to the IRA in 60 days.   Most 401(k) plans receive unlimited protection from your creditors under federal law.  IRA accounts are protected under federal law for bankruptcy and in other cases based on the laws of your particular state.  You may be able to postpone the timing of the required minimum distribution if you are still employed.

How do I decide which option is best for me?  We would be glad to assist you in this process.   There is so much more to consider in order to make the right decision and, of course, you will want to consult your tax advisor to see how such a decision will affect you.

For more information, please contact us.


Source:  Broadridge Investor Communication Solutions, Inc.