When you change careers or companies, you must decide what to do with your retirement accounts and assets. When you are aware of your options for distribution, as well as what impact they will have on your retirement plans you are better able to make the decision that is right for you.
Choosing your 401k rollover options wisely can also mean the difference between an easy retirement, and no retirement at all.
Direct IRA Rollover
In what is by far the easiest way to refrain from paying any required federal or state withholding taxes, plus an additional 10% IRS penalty, direct IRA rollovers convert your 401k into a self-directed IRA account. An Individual Retirement Account is a tax-deferred account that can be used to fund retirement expenses from a qualified employer plan.
Because earnings in an IRA grow tax-deferred, plus earning compounded over the life of the account, IRA’s are superior investment vehicles to other similar tax-deferred accounts.
All may not be lost if you have already received your lump-sum distribution, less the mandatory 20% withholding. You can deposit your funds, plus an additional 20% to cover the difference, into an IRA within 60 days.
Waiting until after the 60 day mark can carry additional IRS penalties, as well as subject your funds to federal and state taxes. You will also lose your tax-deferred status forever.
Get Access To Your Capital
You can gain access to your retirement funds by taking a taxable distribution, but there are a variety of issues that should be considered, including federal and state income taxes, mandatory federal income tax withholding, as well as an additional possible IRS penalty.
Contributions made to your employer’s 401k plan were most likely done with pre-tax dollars. Your employer’s contributions were also tax-deferred if they were made to a qualified plan. When the funds are distributed, you will be required to pay present income taxes on all pre-tax contributions and earnings.
You will only receive 80% of your distribution if you chose to obtain a check immediately from your place of employment. Keep in mind when budgeting that the check you receive will be 20% lower than the balance on the account.
The IRS may also impose a premature distribution penalty if you are under 50½ years old at the time of the withdrawal. In this case, you will have to pay an additional 10% penalty when you file your following years income taxes. Exceptions to this rule include substantially equal payments, disability, and death.
Rollover Your Funds To Your New Employer’s Plan Or Keep In Old Plan
You can transfer your funds directly to your new employer’s 401k from your old plan, if your new employer allows it. This is an excellent way to avoid paying current income taz, as well as the withholding tax of 20%.
If you carry an account balance of $5,000 or more, you may have the ability to keep your capital in your former employer’s plan. These funds will continue their tax-deferred status, and may be moved to another employer at a later date.
When you are 62 or over the plan’s retirement age, your corporation may insist that you receive a payout, thereby eliminating some administrative costs for the plan. In this case, you still have the option to make a direct deposit in to an IRA.