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!

Smart investors are aware of the importance of researching stock before you purchase them. It’s also important to get information from multiple sources so you’re not being swayed by one point of view. It’s even better when you can try a research site for free. Here’s a review of Zach’s Investment Research and a free 30 day trial offer.

Stock market for dummies site is aimed at all the beginners who are trying to make some money in the stock market and have little or no knowledge about the stock market. This will give them a basic understanding of how the stock market operates as well as make them cognizant about the stock market terminology.

Trying to make a decision on what the right investment strategy is for you can be a difficult task for anyone, especially right now, but Stock Market Investing Guide makes that decision a little bit easier. They will help you understand complex investment strategies that you can put to work in your portfolio now!

Another option many investment advisors recommend is to buy gold.  For investors wondering how to invest in gold, the Gold Coins Profits blog notes that many advisors suggest keeping at least a portion of your portfolio in gold as a way to diversify.  In addition, it can be a hedge against inflation.

Ty Coon over at Stock Market Investing Today has started a unique Thirty Day Stock Market Investing Challenge. Each day, he’ll pick one stock and invest $1,000 in a stock simulator. Over the course of 30 trading days, he’ll pick 30 stocks and play them until he is either stopped out or reaches his target gain. Be sure and follow along.

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.

Well, I hope all this information finds you well and answers your investing questions.  Remember to leave a comment and let them know we sent you!!

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.

Here are the basic steps you need to take when participating in a direct 401k rollover to a new account. The whole concept of a 401k rollover may sound like a financial nightmare. When it comes to our money we clearly do not want to make any mistakes, but if you are aware of the necessary steps it can make the whole process a lot more calming for you.

1. The first step is deciding where you are going to rollover your 401k. You can open a new account through a bank, brokerage account or a mutual fund. Make sure to contact a few different companies to learn about their terms and fees and get a consultation so that you can weigh your options properly. Do not jump into the water unless you know what’s out there. If you do not feel you can take this on yourself get some advice from a financial planner or tax advisor.
2. Next you want to talk to the company you’ve chosen to roll your retirement money into and ask of them what is required to proceed with a direct rollover. Sometimes you need to have an account already open to move forward and at times the opening of the account may take place at the same time as the rollover. Also make sure to ask them what you need to acquire from or supply to your old provider.
   **Ask your new provider how long this entire process should take assuming things go smoothly. I will explain why in step # 5 submitting the paperwork.
3. The next step is you want to request all necessary forms from your old plan provider. You want to get these papers in your possession as soon as possible so that you can go over them in case you have any questions regarding the forms. In some cases the old provider may require a rollover request form from your new provider. You want to make sure you are aware of all the necessary paperwork upfront so you don’t bounce back and forth and can get answers to all your questions at one time. While you are asking for the necessary forms, you want to check with your old 401k plan to find out what the procedures are so that you can try and avoid and snafus that may occur. Ensure that they have you on file as a terminated employee because if they do not it can hold up the process.
   **Ask your old provider how long this entire process should take assuming things go smoothly. I will explain why in step # 5 submitting the paperwork.
4. Now is the important step of filling out all of the paperwork correctly. It is important that you indicate that this is a direct rollover which will ensure that the funds are paid directly to the new account. If you have any questions with the forms make sure to call the applicable company, whether it’s your new or old provider as not filling in the paperwork correctly could hold up the process. Even if it seems like a minor question like checking a box, make sure to call. There is no such thing as a dumb question when it comes to rolling over your retirement fund. If you do not feel comfortable filling out this paperwork yourself, hire a professional that can help you with this process. Spending a little money now to ensure that this process goes smoothly is a wise investment.
5. The last thing to do is submit the appropriate forms to the correct provider, new or old. Once you’ve filed the paperwork this isn’t a set it and forget it situation. You want to make sure that you follow up with both providers to make sure that everything is moving along smoothly. Sometimes there can be an issue that is holding up the transfer and you won’t even know about it. You have to remember your old provider does not want your money to leave their hands so if there is a hiccup in the process they may not tell you as quickly as you would have liked. You have to be your own advocate in this situation to make sure all things are taken care of. Remember when I told you to ask both your old and new provider how long this process should take? Their answers should be relatively close and if they differ greatly go with your new provider’s time-line as your old provider may say longer because they do not want to part with your funds. If your providers stated that this should take about two weeks contact them halfway through to ensure everything is moving as planned or if there is any required information needed. This is not a case of no news is good news!

In most situations a check for the amount of the rollover will be sent to you via snail mail. Find out how long it will be for you to receive the check so you can keep an eye out for it. If you do not receive it in a certain amount of time you will want to contact the company in case you need to put a stop on the check and have a new one issued. It is your responsibility to deposit this check into your new account. When you receive the check make sure it is filled out correctly and submit it to be deposited with the appropriate forms. Don’t take your time depositing this check as it is not something you want to forget about or worse, lose.

Remember, it is important to stay on top of this process. It is your retirement money that is at stake after all.

What happens a lot of the time is people will either leave their money sitting in their current 401k plan with their previous employer or cash out early simply because they do not understand how to rollover their money.  While leaving your money with your previous employer is a better choice than cashing out, if you continue to do this with each job you will have multiple accounts all over the place that are not being managed as properly as they could be. This is why participating in a 401k rollover is the smartest option to choose.

Going with a brokerage account will give you a lot more flexibility with your money over a typical 401k with your employer.  With a typical 401k you have limited options to mutual funds and index funds.  If you do not have a great understanding of investing or you are fine with the options provided to you by your employers 401k plan then this may be a good situation for you.  If you want more investment options then you will benefit from a brokerage account.  With a brokerage account you have the ability to benefit from ETF’s or Exchange Traded Funds.   ETF’s are traded like stocks and you have a lot of options to chose from, thousands to choose from.  They have low expenses and there are no investment minimums which make these an extremely attractive retirement investment.  A brokerage IRA offers a great amount of flexibility not only with ETF’s but you can also purchase mutual funds, individual stocks & bonds and in most cases CD’s.

The first thing you want to do is pick a brokerage firm to rollover your 401k into. There are a lot of financial institutions where this can be completed at, however be sure to check out various discount brokers as they tend to have trades with no or lower commission.  Do some research with various companies and find the best fit for you.  You will receive a form that will authorize the direct rollover of your funds into the newly opened account.

Of course there is a disadvantage to a brokerage IRA, despite the many benefits.  The greatest disadvantage is the cost.  When you have a brokerage account you will be charged a fee every time you place a trade with most brokers, unlike most mutual funds where they have a built-in expense ratio.  Another cost is if you decide to trade an ETF you not only pay a trade commission you also have recurring operating costs built into it. So with the flexibility comes a little bit of a price but sometimes the cost is worth it.  If you want to avoid a lot of these fees research some discount or free brokerage firms.

There are some benefits to a 401k rollover to a new employer as opposed to rolling over to an IRA.  This all depends on the options that are in your new employer’s 401k plan.  To invest in an IRA or single mutual fund in most cases you need a minimum investment.  So if you do not have a lot of money in your 401k it will be more difficult to diversify those funds. With a 401k rollover into a new employer’s 401k plan there are generally no investment minimums so it doesn’t matter the amount of money you have in your current 401k.  This means you can diversify a lot easier with a 401k and this is a big benefit!

As stated before there are some drawbacks with a 401k rollover into a new employer’s 401k investment plan.  The main drawback is that you have limited mutual fund investment options.  You are basically stuck with the investment choices that your company selected so there isn’t a lot of flexibility. You won’t have access to any of your funds unless at some point you want/need to take a loan from your 401k, if this is even permitted by your company, or your employment with the company is terminated.  Another drawback is that you could be paying higher fees with a company 401k plan as opposed to an outside plan.  Often times the smaller the company the higher the fees.  Make sure to check out all this information when you get your 401k packet.

If you decide that a 401k rollover to your new employer’s plan is the best option for you, have your current 401k plan transfer your funds directly to your new employer’s retirement plan.  Once the proper paperwork is completed your money is moved directly to your new retirement plan and the money never crosses your path. This is a pretty seamless process and you will be back on your way to growing your tax deferred retirement savings without any interruption.  Ensure that when you directly roll over your 401k funds that you are following federal rollover rules and this will ensure no federal income tax will be withheld from you. Sometimes your old retirement plan will mail you a check and it will be made payable to the custodian of your retirement plan or the trustee.  If you receive a check like this don’t stress about it.  This will still be considered a direct rollover.  You just need to get the check to the institution acting as the trustee of your new retirement plan. If you are unsure of the best option for you or have questions about a direct rollover to your new employer, consult a professional for advice.

If you leave a company and decide to physically receive a part of or all of your 401k assets, this is considered a cash distribution. You may think, “This is my money so I will take it and run”, and the truth is, yes, you can take the money and run but not without paying some hefty taxes first.  State and federal income taxes will take a portion out of your distribution.  When you made the contributions to your 401k you probably did so with pre-taxed dollars.  Your employer contributions were also tax deferred.  When you go with a cash distribution you pay income tax on all pre-taxed earnings. Then there is a mandatory withholding of taxes of 20%.  Yep, you read that right, 20%. So if you had $50,000 in your retirement account and you cashed out your distributions you would pay $10,000 in taxes that your previous employer must pay to the IRS.  If you are still considering this, you also may have to pay a 10% penalty called a premature distribution for withdrawing from the account if you are under the age of 59 1/2 at the time you decided to leave the company.  Essentially if you had $50,000 you would have to pay $5,000 for penalties.  So if you add all the taxes you will pay your $50,000 is now $35,000 or less all because you cashed out early.

Unfortunately, the only benefit to this option is that you have hard cash in your hands now, rather than later.  So if you are in a financial crisis, and by crisis I mean serious medical injuries or tying to save your home, not buy a new wardrobe, then this would be a good option for you to take if you are willing to take the big financial hit.  We all know the tax man is going to get any money he can from us but this is also to deter you from withdrawing early.  The point of a retirement savings account is so that it can continue to grow and earn you money so you can one day retire.  If you withdraw early you have now taken a big chunk of that money and thrown it away.  Please think about your options and look into the 401k rollover plans available whether it’s a 401k rollover to IRA or 401k rollover into your new employer’s retirement plan.  A cash distribution option is not something to take lightly. The money in hand seems nice but you will miss it greatly when you are retired! You may need to seek the advice of a tax adviser if you are still unsure about taking a cash out or if you need a third party to help you decide whether this is your best financial option.

Summary:

• Cash Distributions are only a good idea if you are in a financial crisis and need the money.  Speak with a tax advisor or 401k professional to determine if this is your best option.
• You will get dinged quite a bit by the tax man for cashing out early
• If you are unsure of what to do with your money, leave it in your current 401k plan until you have done some research or consulted with a professional regarding your next move

The option I am going to talk about now is leaving your retirement investment with your previous employer.  I am going to discuss this first, rather than a 401k rollover or cash out option because when you leave your job you may not know exactly what you want to do yet.  I want you to know it is OK to leave your current investments where they are and what the rules are for doing so.  Take some time and do some research.

Depending on your companies rules (I suggest getting a copy), to keep your retirement savings in your previous employer’s retirement savings plan usually means you must have a balance of $5,000 or more. Some companies may only require that your balance was over $5,000 at any given time. The good news with this option is your money will continue to accrue tax-deferred, you still maintain control over how the money is invested among the companies’ investment options, you will continue to receive quarterly statements and if in the future you want to rollover your investments to a new employer who has a qualified plan or to an IRA you can do so without penalty. However, the drawbacks are future contributions may not be allowed or will be restricted, you may have limited access and your money is in the hands of your former employer. With some companies if you are over the plans designated retirement age or are 62 years of age or older, your previous employer may insist you take a payout.  Companies tend to do this to decrease the administrative costs.  If this situation does occur, do not fret as you still have other choices.  Unfortunately you just don’t have the luxury of leaving your money where it is at while you figure out your next move.

Leaving your money in your previous employer’s retirement savings plan is a good choice if you are unsure whether you want to cash out or participate in a 401k rollover and need some time to figure it out.  Another good reason to leave your retirement investments where they are is if you are quitting your job to start your own business.  Leaving the money in its current retirement plan could protect your retirement assets from any creditors if for some unforeseen circumstances your new business does not succeed.  Just make sure you don’t get in a habit of having a trail of old 401ks laying around with multiple previous employers.  Not only does this make it harder for you to keep track but it can also get really complicated when you do retire. If you are unsure of how to proceed with your options or still have questions it is a good idea to call a tax adviser prior to choosing your distribution option.