There is a lot of talk about 401k rollovers.  Many people believe they need to rollover their 401k plan to an IRA when they retire or separate service.  In reality most 401k plans don’t force you into moving your money.  You typically have 4 options available:  roll over to an IRA, cash out the account value, leave the money in your former employer’s plan (if permitted), or roll over the assets to your new employer’s plan (if one is available and rollovers are permitted).  In some cases, you may have additional options available. Before you jump into a rollover, consider these options.

1. Age 55 Rule
If you retire or separate service from your company on or after your 55th birthday, you can access the money in your company sponsored retirement plan without having to pay the 10% penalty that normally would apply to early distributions. Of course you will still need have to pay ordinary income taxes on any withdrawals, but the 10% penalty will be waived.

This rule only applies to employer sponsored plans. Once you rollover to an IRA you no longer have this option available.
For some looking for a way to supplement their income in retirement this can be a good strategy.
Some employer plans limit the number of times per year you can take a withdrawal, sometimes to just once per year. Check with your plans specific rules to be sure.

2. Outstanding Loan:
If you have an outstanding loan, some employer sponsored retirement plans will allow you to continue making payments on the loan. You will need to make specific arrangements with your plan provider and be sure to keep up on your payments. If you don’t keep up on your payments your loan will go into default and you will have to pay taxes on the outstanding balance of the loan at the time of default. You could also get hit with an early withdrawal penalty if the loan defaults before you turn 59 1/2.

3. Roth Conversion Strategy
If you don’t normally qualify for making a contribution directly to a Roth IRA because your over the income limits, one work around strategy is to contribute to a traditional IRA then immediately convert it to a Roth. Because there are no income restrictions for either the Traditional IRA contribution or the Roth conversion, anyone can do this, regardless of their income. However, if you have any existing IRA accounts you will need to use the “pro-rata rules” which can get very messy. If you plan to use this strategy, I would not rollover your 401k plan, unless you plan to convert that to a Roth as well.

4. You like your 401k
Although you may have more investment options by rolling over your 401k to an IRA, some people just like their 401k plan. So if you are comfortable with the investment options, fees and service, you may be able to just leave it there. Consider this especially if your balance is under $25,000, because your 401k fees may be less than they would in a typical IRA account.

5. You plan to rollover the plan to a new employer
If you separated service and plan to go back to work, it may make sense to rollover your current 401k into a 401k plan with a new employer. So you may decide to keep the money in your current 401k until your new 401k gets set up. Make sure you like the options in your new 401k plan before you roll it over. Also keep in mind that once you roll your money into your new plan, it may be locked up in the new plan until you retire or separate service from your new company.


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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.

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