If you’ve left a job with an employer-sponsored 401(k) or 403(b) retirement plan, you have some decisions to make about what to do with your vested retirement dollars.
One of the most common choices is transferring the account into a new rollover IRA account. While terminating employees typically have other options too, such as taking account proceeds in cash; leaving the account right where it is; or possibly rolling the account into a new employer’s 401(k) plan (not all plans offer this as an option), this article focuses on rollovers into IRA accounts.
Here are three things to keep in mind if you are considering an IRA rollover:
1. Taxes. IRA rollovers are designed to have the same tax deferred status as your 401(k) account. So, as long as your rollover is handled correctly, you will not incur tax liability as a result of the rollover. The best way to make sure your rollover is handled right is to have it transferred directly from your employer’s plan into a new IRA rollover account you establish through your financial professional.
If you handle a rollover indirectly, meaning that the plan sends a check to you, not only is your former employer required to withhold 20% for taxes, you also have a 60 day window to reinvest the account proceeds into a rollover IRA account. If the account is not invested into a new rollover IRA within 60 days, the distribution will be treated as taxable. If you are under age 59 1/2, you will also incur a 10% early withdrawal penalty.
2. Investment options. By rolling the funds into an account managed by your investment professional, you will no longer be limited to the investment choices offered by your former employer. This may allow for greater flexibility and diversification.
3. Consolidation. If you have other accounts under management with the same investment professional or firm, you will usually be able to get consolidated statements to help you manage your entire investment portfolio.
While this article is intended to provide a high-level overview, there are other factors to consider and you should evaluate your options carefully. One source for more information is the Financial Industry Regulatory Authority (FINRA). On their website, FINRA describes options and additional considerations.
Contact us for more information about IRA rollovers.