If you've changed jobs or recently retired, you may be wondering what you should do with a 401(k) or other retirement savings account from a former employer.

Take Control of Your Retirement Savings

Rolling over your retirement assets to an Individual Retirement Account (IRA) is non-taxable. An IRA:

• Increases your investment options
• Enables you to take control of your overall retirement plan
• Allows you to move your money out of your former employer's retirement plan without tax consequences or other penalties
• Keeps your savings invested tax-deferred
  May provide better estate planning benefits than your current retirement savings plan
  

When you leave a company’s employment and you have not yet reached 59-1/2, your retirement plan may be the farthest thing from your mind. If you have a 401(k) plan with your former employer, however, you should take some time to consider what to do with the funds. How you handle your 401(k) account can result in anywhere from zero to hefty taxes and penalties.

You have several options regarding your 401(k) and your former employer should provide you with information regarding your options. One of those options is to rollover your 401(k) funds into an IRA. To avoid taxes being withheld and/or a penalty, you must follow certain procedures and be aware of time limitations.

Before beginning the rollover process, determine which financial institution you would like to deposit your 401(k) funds into. Your choices are many, including brokerages, banks, and mutual funds.  Call us if you have any questions.  We can help select the best investment vehicle and we do ALL the paperwork.

In general if you have not yet reached 59-1/2, then lump sum payments that were “before-tax” when contributed by you to the 401(k) plan are eligible for rollover. A rollover can be paid directly to you or it can be implemented as a direct rollover:

Direct Rollover:
In a direct rollover, the funds in your 401(k) account are paid directly into the IRA. With a direct rollover, the 401(k) administrator is not required to withhold any income tax and you do not owe a penalty.  We study the 401(k) documents you received from your former employer and determine the exact procedure to perform a direct rollover. Most likely, we will have to complete and submit one or more forms. The forms and documents will also let us know if your 401(k) funds will be deposited directly into your IRA account or if you will be sent a check payable to your IRA account. If you receive the check, you must then deposit it into your IRA account.

Payment To You:
When you have not yet reached 59-1/2 and chose to have your 401(k) funds paid to you, it is critical you be aware of potential tax penalties. When you receive your 401(k) distribution, you will notice that your former employer has withheld 20% as taxes. This withholding is a requirement. It does not mean you will owe the tax. In order to avoid taxes and tax penalty you must:

1. Complete the deposit into your IRA account within 60 days of receiving the funds and
2. Deposit 100% of your 401(k) funds. This means you must replace the 20% that was withheld for taxes with your own additional funds. When you file your taxes for the year you will not owe taxes on your rollover, but will be able to include the 20% withheld as income tax paid.

If you do not complete 1 and 2 above, expect to pay:
1. Income taxes at your current tax rate on the amount of 401(k) funds you did not rollover plus
2. An additional 10% tax penalty is due because you received retirement funds before you reached 59-1/2.

Needless to say, a direct rollover is less risky and not as complicated as a payment made to you.
If you are over 59-1/2, do not receive your 401(k) funds in a lump sum, or have certain other extenuating circumstances, different rules will apply to you. For this reason, use this information as a guideline only. Please read all of your 401(k) and IRA documents and address any questions you have to your former employer and your financial representative at PCM.  If you are still unsure about any aspect of the rollover, consult your financial advisor or tax consultant.

A 401(k) rollover into an IRA can be time consuming and tedious, but the resulting peace of mind is well worth it.