Good Financial Cents -Jeff Rose Certified Financial Planner and Investment Advisor, Carbondale, Illinois » 401k rollover

Four Options With Your 401k When Changing Jobs

Jeff Rose — Fri, 19 Dec 2008 15:51:36 +0000

401k Rollover Options

Last December, when I left my previous employer to start my own business, I had an important decision to make on what to do with my existing 401k. Luckily, being a financial planner, I knew exactly what I was going to do, but many others that are not in the profession or really don’t have a good grip on their financial situation might not be as fortunate. When changing jobs, the decision that you make to do with your 401k could be a costly one if the wrong decision is made. It’s important to know the different options that you have on what to do with your 401k whenever you leave your current job.

Cash Out 401k

The only reason that I have this option here is because you would be surprised the amount of people I talk to that elect this option. The most common reasoning I here, especially for 401k plans that have matching, is that it’s “The company’s money” not “theirs“. Wow! Isn’t that great reasoning?

By taking “The company’s money”, now that person is stuck with a 10% early withdrawal penalty plus ordinary income tax. Typically, when you cash directly from your 401k they will hold 20% standard plus the 10% early withdrawal penalty. Obviously, this was not the direction I was going to go.

Leave the 401k There

My previous 401k at A.G. Edwards & Sons was one of the best around. I don’t think I’ve seen another that had such a wide array of solid investment choices. I guess one could have made the argument to leave it there, but considering my circumstance, that probably wasn’t the best idea. Considering I was leaving to work for a competitor, LPL Financial, it definitely made more sense to take it with me.

I have heard of instances where people have left their 401k’s with their previous employers and have had difficulty trying to get access to the funds after a significant period. The likelihood of this increases if your previous employer comes under financial duress or merges/gets bought out by another company.

Transfer The 401k to a New Employer

Most people have the option to transfer there old 401k into their new 401k with the new employer. In the past, this used to be more difficult, but with recent government regulation changes, it’s much more easy. While this could be a good decision, a lot depends on the new options that are in the new 401k.

In my case, since I was essentially starting my own business, this was not an option for me. What did I do? Read on to find out…..

Rollover Your401k Into Your Own IRA

Rollover into IRA

I would argue that this would be the most advantageous thing to do. By rolling over your 401k into an IRA, you will further diversify from your new plan, meaning that you can utilize different investments options that complement what you would have in your new plan going forward. In addition to that, you also have full control on the investment decisions inside the plan whereas in a 401(k), you are limited. You have full reign to make all the decisions that you want and you may even seek the counsel of a financial advisor to help direct you in what investment direction that you would go.

Seven Common 401k Rollover Mistakes

Jeff Rose — Wed, 24 Sep 2008 20:02:12 +0000

401k Rollover Mistakes To Avoid

The big day has arrived. You are retiring and have decided to rollover your 401k plan to your own personal IRA. This is a big moment in your life and you want to make sure you do it right. Here’s a few things not to do with your 401k rollover…

1. Choosing incorrect 401(k) distribution options

Choosing the wrong distribution option could cost you a lot of money and headaches. Before making a final decision, it’s critical that you understand the financial stakes of each of your rollover options.

2. Making premature 401(k) distributions.

Retirement distributions before age 59 ½ are usually not a good idea. For one, a good part of your proceeds will go to pay the IRS for a 10% early withdrawal penalty, plus income tax on the amount withdrawn. Double check and make sure that your 401k is structured properly to ensure avoiding the penalty.

3. Relying on employers to give rollover advice.

Most employers are not qualified or licensed to give financial advice, yet many employees look to them for direction. Would you talk to a dentist about your back problems? Finding which rollover options best meet your needs usually requires professional help. Who’s a good candidate? Start with a Certified Financial Planner™.

4. Not properly designating an account beneficiary(s).

Should I name my spouse as beneficiary or my children? A trust? What effect would naming a certain beneficiary for my IRA have on other beneficiaries? What are the tax consequences of choosing one beneficiary over another? If you don’t know the answers to these questions, you probably need to confer with a Certified Financial Planner™.

5. Forgetting to pay back any outstanding 401(k) loans before exiting the plan.

Failing to pay back an outstanding loan in a 401(k) plan before distributing or rolling over your funds, could cause you to pay income taxes on the amount of the outstanding loan. Proceed with caution.

6. Subjecting 401(k) rollovers to 20% withholding tax.

Distribution proceeds paid directly to you instead of being paid the company that you are rolling over to for your benefit will trigger this. Which do you prefer, 80% of your rollover money or 100%? Withholding tax can usually be avoided with direct rollovers.

7. Not taking advantage of the 60-day window.

If you’ve received a direct distribution, it’s likely that 20% withholding tax has been applied to your rollover. That’s the bad news. The good news is the IRS allows a 60-day window in which to place the 80% you receive into an IRA or other qualified retirement plan. Not taking advantage of this provision could subject your funds to IRS penalties.

Three Reasons to Rollover Your 401k

Jeff Rose — Sat, 09 Aug 2008 20:33:16 +0000

401k Rollover

To roll or not to roll, that is the question. You have been working long and hard for many years now. You could be at the same employer or perhaps you have worked for several different ones over the years. While working you made it a point to take advantage of the 401k because of the match they were giving you. Now that you have left your employer (career change or possible retirement), you have an important choice to make. You can either leave the money with your previous employer in the 401k plan or you can do what’s called a 401k rollover. The former seems like the easy option but let me give you some reasons why you want consider rolling over to your own personal Individual Retirement Account (IRA).

1. Variety in Your 401k is the Spice of Life

If you had a choice between a world class buffet or a menu with 3 choices, what would you choose? Personally, I’m going with the buffet (in moderation of course). With a 401k you are mostly limited to mutual funds. On top of that, you may only have 8 mutual funds to choose from. I have seen 401k’s with as little as 8 up to 40 choices. That may seem like enough, but when you roll over to an IRA you have now opened the doors to hundreds of other mutual fund companies and thousands of other choices. But it doesn’t stop there. You can also invest into individual stocks, bonds, annuities, CD’s, unit investment trust and on and on and on. In fact, if you wanted to take all your money and put it all in one stock you could. (Warning: Please do not do this. This will make your financial advisor very nervous)

2. Stretch Out the 401k

Up until recently, any non-spouse beneficiary on a employer retirement plan was forced to cash out over a 5 year period upon inheriting. Thanks to the Pension Protection Act that has changed…..kind of. An “inherited IRA” has to be open and the money has to be rolled into that for it to work. So why not take the safe route and roll it into an IRA. What a Stretch IRA does is allows your beneficiaries to take smaller portions out based on your life expectancy. That it turns means that the bulk of the money will still grow tax deferred and stretch out what you pass on to your kids.

3. Simplify and Consolidate

I have had clients with up to six different 401k plans. Why not consolidate into one IRA to make sure that all the investments are working together and complimenting each other. Also, at age 70 ½ the IRS steps in and starts making you take out a percentage each year in the form of Required Minimum Distributions. This figure would have to be done on each retirement plan and if for some reason you miss it, the IRS imposes a pretty hefty penalty (50% of the amount that was required to be withdrawn).

Rolling over your retirement plan can be a simple process.Next time I will share some common mistakes to avoid that will make the rollover process an easy one.