Get 401k Rollover Info

Taxes seem to be a common question when it comes to our 401k accounts.  When you invest, that money is tax deferred, but we all know we’re going to get taxed at some point.  It’s inevitable.  The saying is “nothing is certain but death and taxes”.  Isn’t that the truth?  Well, we can’t do much about the death part, but we can educate ourselves about our tax responsibilities on the money we are investing.

So the question is do you pay taxes on a 401k rollover?  It depends on how you roll it over.  The rule of thumb is if you touch the money yourself, meaning you get a check from your retirement fund to deposit into a new account or you cash out completely, you are going to pay taxes.  If you transfer it from plan to plan, also known as a direct rollover, you will not be taxed.  They do this because if you have the cash in your hand, they treat it as new income.  Having cash in hand from your 401k defeats the purpose of a retirement plan and to deter you from cashing out early, they hit you with taxes and penalties.

If you take the money out of your previous employers retirement account you have 60 days to deposit that money into a new retirement account to avoid paying income taxes.  You will however be hit with an automatic 20% mandatory withholding for federal taxes which you want to pay back.  Whatever portion that you do not rollover will not only be hit with income tax, you could be subject to another 10% additional penalty due to early distribution. There are certain circumstances when this will not apply but essentially it means if you take the money prior to turning 59 ½ you may be liable for this 10% additional tax.

Whenever possible, you want to do a direct rollover to avoid paying a lot of money in taxes.  If you do decide to take a check and roll it over yourself, make sure you take care of it within 60 days. Remember, you have a retirement account for a reason.  You want to avoid dipping into this account unless necessary.  My next article will be about a few other 401k rollover questions, like what the exceptions are to the 10% additional penalty and when it’s ok to borrow from your 401k. The second part is going to be very short!

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You may also want to find more information regarding the rules when rolling over your 401k.  Make sure you visit here, 401k rollover rules for more information.

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I think one of the most common questions that people ask when it comes to rolling over their retirement funds is what are the 401k rollover drawbacks? The answer to that question depends on where you are rolling over your retirement funds too.

If you rollover to a brokerage IRA, the main drawback to this is cost. With a brokerage IRA, if you place a trade with a broker you will be charged a fee every time that you place a trade.  You may also incur a transaction fee to make a mutual fund trade.  There are however some brokerage IRA companies that offer discounted or free brokers.

If you are rolling over to a new employer then one drawback is if you work for a smaller company you may be paying higher plan fees than you would with other retirement investing options.    Another drawback is you lose a lot of flexibility. You are stuck with the investment choices that your company has selected for their plan as well as their rules.  You also cannot access your funds again unless you fit into a small window of allowed circumstances like hardship or disability, you take a loan against your 401k or your employment with the company is terminated, whether by them or by you.

If you rollover to a mutual fund IRA you will have investment minimums to meet.  They often range between $500 and $3000 just to invest into a single fund before you can purchase any shares. You also lose a lot of flexibility.  Just as you are stuck with an employer’s investment options, you are also stuck to what the mutual fund offers. Should you be interested in ETFs, individual stocks etc, you will most likely have to open an account with a brokerage.

Another thing to consider is if you rollover into an IRA account and you have assets worth more than one million dollars and you are considering personal bankruptcy, that money could be taken to satisfy the debts that you have in some scenarios. If you have an employer sponsored retirement plan those assets in most circumstances cannot be taken.  It is best to check with your states bankruptcy laws.  One other drawback is if you rollover to an IRA and whether or not you are working at the age of 70 ½ you are required to being taking distributions.

So as you can see, the drawbacks to a 401k rollover depend on where you intend to move your retirement investments.  Consider each option, weight the pros and cons and if you still are not sure talk to a tax advisor or financial advisor.  They will be able to help you make an educated decision about your 401k rollover.