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401(k) Rollover 101

In today’s tough current economic climate, many of us are losing or changing jobs. If this happens to you, you may be wondering what to do with the money in your 401(k) account.

It is important you know you have options, and understand the implications of those options. For example, if you leave your job – whether or not it is voluntarily – you are eligible to a distribution of the vested balance of your account. The vested balance includes all contributions to your 401(k), whether they are pre-tax, after-tax or Roth, as well as the investment earnings on that money. You may also have employer contributions and earnings which have met the criteria for your plan’s vesting schedule.

Do your homework

You should become familiar with your old company’s specific vesting policies. If you have any questions, check with your plan’s summary plan description (SPD), which should answer any questions you may have about your vesting schedule.

As a rule you must be 100% vested in your employer's contributions after three years of service – what is called “cliff vesting” – or you must vest gradually, at 20% per year until you are fully vested after six years, which is known as “graded vesting”. Remember, these are general rules; some vesting schedules have 100% immediate vesting. You also should be 100% vested by the time you reach the normal retirement age for your plan.

If you are not vested when you leave a job, you will lose any employee contributions. From a financial standpoint, if you are close to retirement if might make sense to wait before you leave your job, if it is possible to do so.

The best advice we can give to you is not touch the money in your 401(k) unless you feel you have absolutely no other viable option. If you do take money out, you will be taxed at a regular rate on the entire amount except for any after-tax contributions you have made. If you are younger than 55 years old, an extra penalty of 10% may apply to the taxable portion of your payout.

Again, know and understand the rules of your particular plan. There are always exceptions you will not be aware of. For example, if the lump sum includes employer stock, or if you were born before 1936 and you take a lump-sum distribution, special rules may apply.

If you have a vested balance of more than $5,000, you can leave money in your employer’s plan until you reach the regular retirement plan. Your employer must allow you to make a direct rollover to an IRA or the 401(k) of another employer. If possible, you should do a direct rollover, which is more advantageous to you than what is called a “60-day rollover”. In that scenario, you get a check and roll the money over on your own, after your employer has withheld 20% of the taxable portion. You will have to come up with the 20% that was withheld, before you file your income tax return.

Remember, you have options

For example, if you are weighing the choice of rolling your money over to a new employer’s 401(k) plan or to an IRA, know those are both good choices. You should consult with your Financial Advisor to determine your best course of action, because your answer could have a big impact on your bottom line.

Advantages of rolling over to an IRA

As a rule, an IRA gives you more investment options than a 401(k). You will be able to divvy up your money among the various investments recommended by your IRA trustee, while employer-sponsored plans usually offer investors a smaller menu of investments.

You can allocate IRA money among various trustees. There is no limit on the number of direct IRA transfers you can do in a year, which means you can change trustees if you do not like the customer service or the level of investment performance you are experiencing. This technique also allows for more diversification, because you can have IRA accounts with more than one institution. An IRA gives you more flexibility with your distributions, allowing you to convert your 401(k) plan distribution to a Roth IRA.

Rolling over to the 401(k) plan at your new employer

Often, employer-sponsored plans allow employees to take out loans of up to 50% against the amount of their 401(k). This is one advantage a 401(k) has over an IRA – you are not allowed to borrow from an IRA, except for taking a distribution and then rolling back the money to an IRA within 60 days.

Another issue to consider is legal protection from creditors. A rollover to a new employer’s

401(k) plan may provide greater protection from creditors than a rollover to an IRA. With some exceptions, 401(k) plans receive unlimited protection from your creditors under federal law. For example, creditors (again, with some exceptions) cannot attach money in your 401(k), even if you have declared bankruptcy. As a rule, any amount you have rolled over to a traditional or Roth IRA is protected under federal law only if you declare bankruptcy.


You might be able to postpone required minimum distributions. Distributions must begin by

April 1 following the year you reach age 70½, for traditional IRAs. If you work past that age and are still taking part in an employer 401(k) plan, you can choose to delay your first distribution from that plan until April 1 following the year you retire. In this scenario, you also must own no more than 5% of the company.

If you are considering whether to initiate a rollover, make sure you do your homework. For example, find out possible surrender charges which might be imposed by your current employer plan, or new surrender charges that your IRA may impose. You should also compare investment fees and expenses which are charged by your IRA and investment funds with those charged by your employer plan, if any. Make sure you understand if you are forfeiting any accumulated rights or guarantees when transferring money out of your employer plan.

Of course, if you have any questions or concerns about your IRA, 401(k) or any other retirement-related financial issue, please contact you Financial Advisor.


DISCLOSURE: WealthTrust Arizona is a fee-based investment advisory firm that specializes in integrating portfolio management with estate planning for high net worth individuals and families. Services include portfolio management, estate planning, asset and lifestyle preservation, taxation concerns, access to trust and estate documentation preparation, business succession planning and more. The professionals at WealthTrust -Arizona are frequently sought out by national media such as The Wall Street Journal, Forbes, New York Times, CNBC, Bloomberg Radio and others to share their thoughts on matters that impact our clients.

Given the recent events impacting investors and their financial security, we would welcome the opportunity to provide a second opinion for anyone who would like to have a check-up on their investments, financial plan or estate plan. If you know of anyone who may have a concern with their current advisor or current investment portfolio, we encourage you to share our contact information with those that could benefit from a complimentary review.

Advisory services offered through WealthTrust Arizona, a registered investment advisor. WealthTrust Arizona does not engage in the trust business in the state of Arizona or in any other jurisdiction. Not FDIC insured. Not bank guaranteed. May lose value, including loss of principal. Not insured by any state or federal agency.


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