401(k) / 403(b) Rollover

 

If you, like many other people, have left a company recently, you have a decision to make regarding your 401(k) or 403(b) assets. These assets are critically important to your financial security later in life and must be managed carefully and invested wisely in order to ensure they are available when you need them. Our Center for Wealth Management team will work with you to guide you through the decision making process. Our goal is to assist you in making the right decision for YOU and your family and protect your assets.

So, what are the differences between an employer sponsored 401(k) or 403(b) and an IRA? Here are some highlights of the differences and advantages/disadvantages:

  • A company sponsored 401(k) typically has fewer investment choices and less flexibility as compared to an IRA
  • An IRA will afford you the opportunity to make key decisions that affect your overall costs, investment direction and asset allocation. By choosing specific investments you can choose a philosophy that matches your risk tolerance and meets your investment goals
  • Internal Revenue Service rules dictate that IRA, 401(k) or 403(b) withdrawals before age 59 ½ come with tax penalties. However, there are a variety of special circumstances that will allow early withdrawal. In some cases, these rules may be more lenient than employer hardship rules.
  • IRA’s have advantages in estate planning that are not available with company sponsored plans. IRA assets can be divided among multiple beneficiaries in an estate plan. Furthermore, each of the beneficiaries can use tools such as the Stretch IRA provision to maintain the tax advantages. Assuming the IRA custodian rules are similar to the IRS (not more stringent), this pushes the tax liability to a time later in life when their tax rates will presumably be less. In direct contrast, company sponsored plans generally require that the funds be withdrawn over a 5 year period as they do not want to administer the account for a deceased employee. This timetable may not be advisable for your beneficiaries.

So what are my 401(k) or 403(b) Options?

Direct Rollover into an Individual Retirement Account (IRA)
Care must be taken in the process of a Direct Rollover to avoid tax penalties. To head off a special 20% withholding, you must first create your IRA account and then ask your employer to transfer your assets directly to your IRA custodian. Should you have already requested a 401(k) distribution and had a 20% withholding taken from it, you have 60 days from the date you received your payout to invest these funds in an IRA along with an additional 20% to cover the withholding. When you file your income tax return in the following year, you will get a credit for this withholding.

Investments in an employer sponsored 401(k) can include mutual funds, stocks, bonds, etc. In many cases, you can “transfer in kind” which will maintain your stock positions in your new IRA. Should the investments be unique to your employer, they will be sold and transferred as cash.

Taxable Distribution
Although usually undesirable, you may also choose to receive a lump sum distribution. Be aware of the following:

  • The contributions you made to your 401(k) were from pre-tax dollars and in addition, any employer contributions were not taxed. Therefore, a lump sum distribution will be subject to federal and state income taxes.
  • There will also be a mandatory 20% federal income withholding.
  • If you have not yet reached the age of 59 ½, you will also have to pay the IRS a 10% penalty.

Transfer to a New Employer’s Plan
Check with your new employer, as they may allow the transfer from another employer’s plan. This can be done directly without the 20% withholding.

Remain in Your Old Employer’s Plan
If your 401(k) balance is $5000 or more, your former employer may allow you to keep your plan in place. Your funds will continue to accumulate in a tax deferred manner and you can choose to move them at any time in the future. If you are over your company’s retirement age and/or age 62, your former employer may require you to move your funds in order to reduce their administrative costs.
 

If you want professional assistance in deciding which option is best for you, please contact us.

 

 

Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in/on this website is not intended to (and cannot) be used by anyone to avoid IRS penalties. This website supports the promotion and marketing of MetLife products and/or services. You should seek advice based on your particular circumstances from an independent tax adviser.