Four Avoidable 401k Rollover Mistakes
1. Triggering Taxes - Make sure your rollover is a trustee to trustee transfer and the check is not made out to you. Moving assets from a 401(k) into a special IRA called an IRA rollover should be done in a trustee to trustee transfer. This is the best method to avoid any tax problems and continue having earnings grow tax deferred. Generally if you are under 591/2 you would be subject to a 10% early distribution penalty and ordinary income taxes if you are in receipt of these funds and do not rollover the assets within 60 days (source www.irs.gov).
If the money is sent as a check in the account holder's name, the account holder has 60 days to put the money into a rollover IRA. The government will withhold 20% of your check and you will be responsible for making up this 20% if you wish to have the full amount rolled over to your IRA. You may be eligible to get some or all of this back when you file your taxes.
Keep in mind that account holders are allowed one 60-day rollover per year. The financial institution will not necessarily keep track of when your last 60-day rollover took place.
2. Not Considering Net Unrealized Appreciation - If you own your own companies stock in your 401k plan. When you leave your employer you may have an important tax decision to make regarding whether to rollover your own company’s stock for continued tax deferred growth in a rollover IRA or elect to pay ordinary income taxes on your cost basis but capital gains on the appreciation and forfeit the continued tax deferred growth.The implications of missing out on Net Realized Appreciation are magnified if you have you have large amounts of company stock or large gains.
3. Not considering Rolling Over After Tax contributions to a Roth IRA - After tax contributions to your 401k can be rolled over to your individual Roth IRA and earnings will grow tax free, not tax deferred. There are no income restrictions and no tax due. This assumes you have after tax contributions that were not already contributed directly to a Roth portion of your 401k.
4. Not Dealing with your 401k at all - With all the emotions and decisions that come with retiring or being displaced it is easy to put off making decisions about something as important as your 401k. Not paying attention to your investments in relation to your time horizon, risk tolerance and overall financial plan puts you at risk for not achieving your financial goals and dreams when you retire. If you are retiring, now is the time to put together a customized retirement income distribution plan with the goal of providing guidelines for creating retirement income designed to last your entire life.
Take the time to schedule a complimentary consultation for a second opinion or to review your financial picture with a Certified Financial Planner. Please call 336-659-9638 or AdvanceFinancialGroupCFP.com
The information in this material is not intended as tax or legal advice. Please consult a legal or tax professional for specific information regarding your individual circumstance. The content is developed from sources believed to be providing accurate information.
1. Triggering Taxes - Make sure your rollover is a trustee to trustee transfer and the check is not made out to you. Moving assets from a 401(k) into a special IRA called an IRA rollover should be done in a trustee to trustee transfer. This is the best method to avoid any tax problems and continue having earnings grow tax deferred. Generally if you are under 591/2 you would be subject to a 10% early distribution penalty and ordinary income taxes if you are in receipt of these funds and do not rollover the assets within 60 days (source www.irs.gov).
If the money is sent as a check in the account holder's name, the account holder has 60 days to put the money into a rollover IRA. The government will withhold 20% of your check and you will be responsible for making up this 20% if you wish to have the full amount rolled over to your IRA. You may be eligible to get some or all of this back when you file your taxes.
Keep in mind that account holders are allowed one 60-day rollover per year. The financial institution will not necessarily keep track of when your last 60-day rollover took place.
2. Not Considering Net Unrealized Appreciation - If you own your own companies stock in your 401k plan. When you leave your employer you may have an important tax decision to make regarding whether to rollover your own company’s stock for continued tax deferred growth in a rollover IRA or elect to pay ordinary income taxes on your cost basis but capital gains on the appreciation and forfeit the continued tax deferred growth.The implications of missing out on Net Realized Appreciation are magnified if you have you have large amounts of company stock or large gains.
3. Not considering Rolling Over After Tax contributions to a Roth IRA - After tax contributions to your 401k can be rolled over to your individual Roth IRA and earnings will grow tax free, not tax deferred. There are no income restrictions and no tax due. This assumes you have after tax contributions that were not already contributed directly to a Roth portion of your 401k.
4. Not Dealing with your 401k at all - With all the emotions and decisions that come with retiring or being displaced it is easy to put off making decisions about something as important as your 401k. Not paying attention to your investments in relation to your time horizon, risk tolerance and overall financial plan puts you at risk for not achieving your financial goals and dreams when you retire. If you are retiring, now is the time to put together a customized retirement income distribution plan with the goal of providing guidelines for creating retirement income designed to last your entire life.
Take the time to schedule a complimentary consultation for a second opinion or to review your financial picture with a Certified Financial Planner. Please call 336-659-9638 or AdvanceFinancialGroupCFP.com
The information in this material is not intended as tax or legal advice. Please consult a legal or tax professional for specific information regarding your individual circumstance. The content is developed from sources believed to be providing accurate information.