401K Rollover
401k qualified retirement plans can
have a tax-deferred rollover to an
IRA when
someone changes jobs or retires. In some cases employers permit a 401k
to be rolled over to an IRA while you are still employed with that
employer. That is called an in-service distribution. Generally speaking
it is better to do a 401k rollover to an IRA because you have more
freedom
to invest and you have more control and better service in terms of
estate planning details. Also, if you keep several 401k's this can get
confusing because each employer has different rules and different
investment choices.
However, there are reasons to not do a 401k
rollover. You
can borrow from a 401k, but not from an IRA. 401k plans at large
employers can sometimes access low cost "I" class mutual funds that are
not available to retail consumers. If you terminate employment after
the year you turn age 55 you can get a distribution (not a loan) from a
401k with no early withdrawal penalty, but for IRA's you must wait till
age 59 and a half.
So if you will reach age 55 in December, 2010, then in January, 2010,
when
you are 54.1 years old, if your employment ends then 401k distributions
are penalty free. But you can't be unemployed before that calendar
year, so if you lost you job a year before turning age 55 then you are
out of luck. Of course, you still pay the regular income tax when doing
a penalty free early distribution. 401K
rollovers can not be reversed back out of an IRA and into the 401k,
unless someone becomes re-employed at their old job, and not all
employers allow rolling of an IRA into a 401k. This means you should
get careful tax planning and retirement planning to see what is the
best strategy. Tax and retirement planning needs to be integrated with
investment planning. For example, the investments in the 401k need to
be coordinated with those in the IRA and in the taxable account, plus
cash flow needs for retirement need to be planned for and cash for
emergencies needs to be set aside.
Whenever you do a 401k rollover to an IRA or
vice versa always tell the Custodian to do a "Custodian-to-Custodian"
transfer. Tell the old Custodian to be sure to structure the transfer
as one that will have no tax withholding. Make sure the new Custodian
puts the funds into a tax qualified retirement account such as an IRA
or 401k. It is best to do a 401k rollover to an IRA by using the same
company, so if your 401k Custodian is company "X" then have "X" be the
Custodian of your IRA that will accept the proceeds of the 401k
rollover. Later you can rollover the IRA from "X" company to an IRA at
your favorite Broker-Dealer in a tax-deferred Custodian to-Custodian
transfer.
Beware of a tax trap: when doing a 401k rollover to
an IRA,
before doing so check to see if you have a Net Unrealized Appreciation
(NUA) of company stock in the 401k. Special rules apply that, if not
followed, create an
irreversible tax trap. This is why it is important to get integrated
financial planning.
Mayflower Capital
Donald
Martin, CFP®
1000 Fremont Ave.
Ste.
135
Los
Altos,
CA 94024
(650) 949-0775
Don@mayflowercapital.com
Donald
Martin is a Napfa
registered fee-only financial planner and investment advisor.
