401k Rollover

401k Rollover 2017-01-10T23:32:49-08:00

401k qualified retirement plans can have a tax-deferred rollover to an IRA when someone changes jobs or retires. In some cases employers permit a 401k to be rolled over to an IRA while you are still employed with that employer. That is called an in-service distribution. Generally speaking it is better to do a 401k rollover to an IRA because you have more freedom to invest and you have more control and better service in terms of estate planning details. Also, if you keep several 401k’s this can get confusing because each employer has different rules and different investment choices.

However, there are reasons to not do a 401k rollover. You can borrow from a 401k, but not from an IRA. 401k plans at large employers can sometimes access low cost “I” class mutual funds that are not available to retail consumers. If you terminate employment after the year you turn age 55 you can get a distribution (not a loan) from a 401k with no early withdrawal penalty, but for IRA’s you must wait till age 59 and a half. So if you will reach age 55 in December, 2010, then in January, 2010, when you are 54.1 years old, if your employment ends then 401k distributions are penalty free. But you can’t be unemployed before that calendar year, so if you lost you job a year before turning age 55 then you are out of luck. Of course, you still pay the regular income tax when doing a penalty free early distribution. 401K rollovers can not be reversed back out of an IRA and into the 401k, unless someone becomes re-employed at their old job, and not all employers allow rolling of an IRA into a 401k. This means you should get careful tax planning and retirement planning to see what is the best strategy. Tax and retirement planning needs to be integrated with investment planning. For example, the investments in the 401k need to be coordinated with those in the IRA and in the taxable account, plus cash flow needs for retirement need to be planned for and cash for emergencies needs to be set aside.

Avoid these 401K Mistakes!

Whenever you do a 401k rollover to an IRA or vice versa always tell the Custodian to do a “Custodian-to-Custodian” transfer. Tell the old Custodian to be sure to structure the transfer as one that will have no tax withholding. Make sure the new Custodian puts the funds into a tax qualified retirement account such as an IRA or 401k. It is best to do a 401k rollover to an IRA by using the same company, so if your 401k Custodian is company “X” then have “X” be the Custodian of your IRA that will accept the proceeds of the 401k rollover. Later you can rollover the IRA from “X” company to an IRA at your favorite Broker-Dealer in a tax-deferred Custodian to-Custodian transfer.

Beware of a tax trap: when doing a 401k rollover to an IRA, before doing so check to see if you have a Net Unrealized Appreciation (NUA) of company stock in the 401k. Special rules apply that, if not followed, create an irreversible tax trap. This is why it is important to get integrated financial planning.