Did You Know…?

by Mae Gerhart, CPA – Tax Accountant / Financial Planning Professional
When you leave a job, you can often leave your 401(k) in your prior employer’s plan. Some 401(k) plans require immediate distributions if the balance is $5,000 or less.

If you receive a distribution check from your 401(k) there may be significant tax consequences, such as including it in income and an additional 10% early withdrawal penalty! One way to avoid this penalty is to perform a direct IRA rollover which transfers the money directly from your 401(k) to an IRA.

Some benefits of a self-directed IRA rollover include:

  • Such a transfer can be accomplished tax-free
  • You can increase the investment flexibility and choices in your Rollover IRA
  • A rollover IRA gives you the most distribution features and flexibility in retirement

Distributions from IRAs may qualify for an exception to a 10% early withdrawal penalty before age 59 ½ if used for a first-time home purchase ($10,000 lifetime maximum), qualified higher education expenses for yourself, your spouse, child, or grandchild, or for health insurance premiums for certain unemployed individuals. But it’s all in the name–these exceptions do not work if the money was pulled out of a 401(k)!

It doesn’t always make sense to rollover your 401(k) to an IRA. For example, if you are separating from service in or after the year you reach 55 (50 for qualified public safety employees) or if you hold employer stock in your 401(k), there might be other strategies available.

Please reach out to your financial advisor to help you determine the best course of action for your 401(k) at an old employer.

RELATED ARTICLE: Switching jobs? Don’t make these mistakes with your retirement plan (cnbc.com)

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