To Rollover or Not Rollover, That is The Question

There are many decisions that need to be made when changing employers or retiring. One of the key decisions that you may need to make is whether or not to rollover your retirement plan, 401(k), from the previous employer. As mentioned in Top Five Things to Review Before Changing Jobs, you have several options when separating from service and it is important to do a careful review upon your departure.

Depending on your account balance you may not have any choice and may be required to take a distribution. It is important that you read your company’s summary plan description to see if there is a minimum level, such as $5000, where they force you to take a distribution. It is common for companies to impose this minimum so they are not burdened with maintaining what is needed for many smaller accounts for employees that are no longer with the company. When faced with this distribution, you will have the option to roll over the assets to your own IRA, your new employer’s 401(k) or simply have a check cut to you. Be aware of the tax consequences of simply taking the check. The options and consequences are very similar to those that are not forced to rollover, so keep reading.

Assuming that you are not going to be forced to take a distribution, you will be presented with several options for your 401(k) assets and we will discuss each of them here:

• You will be able to maintain your 401(k) account with the current provider at your previous employer. This would not require any changes and your account would continue to be managed as it was previously, by you. The main difference would be that you would no longer have any contributions being deposited into the account.
• Rolling over your 401(k) to a current (or newly opened) Individual Retirement Account or IRA. This would be a non-taxable event as long as you perform the movement of monies as a direct rollover. This would then allow you to take over management of the assets or hire a wealth management firm or advisor to assist you with investing these funds. You would not be limited to the investment menu presented by your previous company and now would have the ability to invest the funds however you see fit.
• Another option you may have, depending on the plan provisions for your new employer, would be to roll the assets over into your new employer’s retirement plan. Like rolling it over to your own IRA, this would be a non-taxable event if you handle it as a direct rollover. You would still be in a position to manage these assets on your own and would be limited to whatever investments the new employer offers in their plan.
• The last option you would have is taking a distribution. This would be a taxable event and depending on the size of the 401(k) could cost you a considerable amount in taxes. A distribution or withdrawal would be taxable as ordinary income in the year you take the distribution. When taking this type of withdrawal there is a 20% mandatory federal tax withholding by the plan. This is used to offset your tax liability for the year. Essentially, if your 401(k) at the time of distribution is worth $100,000 you would only receive a check in the amount of $80,000. The $20,000 would be sent in as a Federal tax withholding to offset your liability for the year. Keep in mind, this does not mean that this is all the tax you owe. Depending on your tax bracket for that given year, you may owe more or you may end up getting a refund because you withheld too much over the course of the year. Before exercising this option it is very important to consult with your tax advisor to make certain there are not any unintended consequences down the road.

The choices here are not easy ones to make and should be considered very carefully. It is important to speak with a fiduciary advisor that can outline and walk you through the pros and cons of each option. As an example, one of the tremendous benefits of rolling the assets into your own IRA would be the freedom and flexibility of the investments you can choose. In addition, it would provide you with the ability to have an advisor assist you with the investments as well. These two benefits may come with a cost and it is important to understand what the cost/benefit is of making this transition. You want to make sure that you are making a change for the right reasons and the decision will ultimately benefit you and your family in the end.

This decision making process is something we have walked many clients through before and we are confident we can help you as well. Please feel free to contact us, Mitlin Financial, at (844) 4-MITLIN x12 if you or someone you know has changed jobs recently, plans to change jobs, retire or simply has a 401(k) plan with a previous employer. We look forward to helping you, and them, make the decision that is best for all.

?This article represents the opinion of Mitlin Financial Inc. It should not be construed as providing investment, legal and/or tax advice.