Changing jobs take your 401k and roll it

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  • 1. Robert Tomaszewski, MBA, CFP® Certified Financial Planner ™ 2530 S Rochester Rd Rochester Hills, MI 48307 248-299-4200 robert.tomaszewski@raymondjames.comChanging Jobs? Take Your 401(k) and ... Roll It!If youve lost your job, or are changing jobs, you may leave your money in your employers plan until yoube wondering what to do with your 401(k) plan reach normal retirement age. But your employer mustaccount. Its important to understand your options. also allow you to make a direct rollover to an IRA or to another employers 401(k) plan. As the nameWhat will I be entitled to? suggests, in a direct rollover the money passesIf you leave your job (voluntarily or involuntarily), youll directly from your 401(k) plan account to the IRA orbe entitled to a distribution of your vested balance. other plan. This is preferable to a "60-day rollover,"Your vested balance always includes your own where you get the check and then roll the money overcontributions (pretax, after-tax, and Roth) and yourself, because your employer has to withhold 20%typically any investment earnings on those amounts. of the taxable portion of a 60-day rollover. You canIt also includes employer contributions (and earnings) still roll over the entire amount of your distribution, butthat have satisfied your plans vesting schedule. youll need to come up with the 20% thats been withheld until you recapture that amount when you fileIn general, you must be 100% vested in your your income tax return.employers contributions after 3 years of service ("cliffvesting"), or you must vest gradually, 20% per year Should I roll over to my newuntil youre fully vested after 6 years ("graded employers 401(k) plan or to an IRA?vesting"). Plans can have faster vesting schedules,and some even have 100% immediate vesting. Youll Assuming both options are available to you, theresalso be 100% vested once youve reached your plans no right or wrong answer to this question. There arenormal retirement age. strong arguments to be made on both sides. You need to weigh all of the factors, and make a decisionIts important for you to understand how your based on your own needs and priorities. Its best toparticular plans vesting schedule works, because have a professional assist you with this, since theyoull forfeit any employer contributions that havent decision you make may have significantvested by the time you leave your job. Your summary consequences--both now and in the future.plan description (SPD) will spell out how the vestingschedule for your particular plan works. If you dont Reasons to roll over to an IRA:have one, ask your plan administrator for it. If youre • You generally have more investment choices withon the cusp of vesting, it may make sense to wait a an IRA than with an employers 401(k) plan. Youbit before leaving, if you have that luxury. typically may freely move your money around toDont spend it, roll it! the various investments offered by your IRA trustee, and you may divide up your balanceWhile this pool of dollars may look attractive, dont among as many of those investments as you want.spend it unless you absolutely need to. If you take a By contrast, employer-sponsored plans typicallydistribution youll be taxed, at ordinary income tax give you a limited menu of investments (usuallyrates, on the entire value of your account except for mutual funds) from which to choose.any after-tax or Roth 401(k) contributions youve • You can freely allocate your IRA dollars amongmade. And, if youre not yet age 55, an additional different IRA trustees/custodians. Theres no limit10% penalty may apply to the taxable portion of your on how many direct, trustee-to-trustee IRApayout. (Special rules may apply if you receive a transfers you can do in a year. This gives youlump-sum distribution and you were born before flexibility to change trustees often if you are1936, or if the lump-sum includes employer stock.) dissatisfied with investment performance orIf your vested balance is more than $5,000, you can customer service. It can also allow you to have February 25, 2013 Page 1 of 2, see disclaimer on final page
  • 2. In some cases, you have IRA accounts with more than one institution for state. If you are concerned about asset protection,no choice--you need to added diversification. With an employers plan, be sure to seek the assistance of a qualifieduse the funds. If so, try you cant move the funds to a different trustee professional.to minimize the tax unless you leave your job and roll over theimpact. For example, if • You may be able to postpone required minimumyou have nontaxable funds. distributions. For traditional IRAs, theseafter-tax contributions in • An IRA may give you more flexibility with distributions must begin by April 1 following theyour account, keep in distributions. Your distribution options in a year you reach age 70½. However, if you workmind that you can roll 401(k) plan depend on the terms of that past that age and are still participating in yourover just the taxable particular plan, and your options may be limited. employers 401(k) plan, you can delay your firstportion of your However, with an IRA, the timing and amount of distribution from that plan until April 1 following thedistribution and keep thenontaxable portion for distributions is generally at your discretion (until year of your retirement. (You also must own noyourself. you reach age 70½ and must start taking more than 5% of the company.) required minimum distributions in the case of a • If your distribution includes Roth 401(k) traditional IRA). contributions and earnings, you can roll those • You can roll over (essentially "convert") your amounts over to either a Roth IRA or your new 401(k) plan distribution to a Roth IRA. Youll employers Roth 401(k) plan (if it accepts have to pay taxes on the amount you roll over rollovers). If you roll the funds over to a Roth IRA, (minus any after-tax contributions youve the Roth IRA holding period will determine when made), but any qualified distributions from the you can begin receiving tax-free qualified Roth IRA in the future will be tax free. distributions from the IRA. So if youre establishing Reasons to roll over to your new employers a Roth IRA for the first time, your Roth 401(k) 401(k) plan: dollars will be subject to a brand new 5-year holding period. On the other hand, if you roll the • Many employer-sponsored plans have loan dollars over to your new employers Roth 401 (k) provisions. If you roll over your retirement funds plan, your existing 5-year holding period will carry to a new employers plan that permits loans, over to the new plan. This may enable you to you may be able to borrow up to 50% of the receive tax-free qualified distributions sooner. amount you roll over if you need the money. You cant borrow from an IRA--you can only When evaluating whether to initiate a rollover always access the money in an IRA by taking a be sure to (1) ask about possible surrender charges distribution, which may be subject to income tax that may be imposed by your employer plan, or new and penalties. (You can, however, give yourself surrender charges that your IRA may impose, (2) a short-term loan from an IRA by taking a compare investment fees and expenses charged by distribution, and then rolling the dollars back to your IRA (and investment funds) with those charged an IRA within 60 days.) by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may • A rollover to your new employers 401(k) plan be giving up by transferring funds out of your may provide greater creditor protection than a employer plan. rollover to an IRA. Most 401(k) plans receive unlimited protection from your creditors under What about outstanding plan loans? federal law. Your creditors (with certain In general, if you have an outstanding plan loan, youll exceptions) cannot attach your plan funds to need to pay it back, or the outstanding balance will be satisfy any of your debts and obligations, taxed as if it had been distributed to you in cash. If regardless of whether youve declared you cant pay the loan back before you leave, youll bankruptcy. In contrast, any amounts you roll still have 60 days to roll over the amount thats been over to a traditional or Roth IRA are generally treated as a distribution to your IRA. Of course, youll protected under federal law only if you declare need to come up with the dollars from other sources. bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particularThis information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond JamesFinancial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary orstatement of all available data necessary for making an investment decision and does not constitute a recommendation. The informationcontained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Thisinformation is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitablefor all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services,Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC, an independent broker/dealer, and are not insuredby FDIC, NCUA or any other government agency, are not deposits or obligations of the financial institution, are not guaranteed by the financialinstitution, and are subject to risks, including the possible loss of principal. Page 2 of 2 Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2013