Handle Retirement Plan Rollovers with Care

January 13, 2022 HoganTaylor Wealth

Retirement Plan Rollovers

Because of the COVID-19 pandemic and other reasons, job upheaval has become common among Americans over the past year or so. If you may soon change employers, handle your retirement plan assets with care.

Leave as is

If your plan with your previous employer has a balance of at least $5,000, it must allow you the option to leave your money in the account. This is an easy option, but it has its risks. Your ex-employer may restrict your ability to change your portfolio, take distributions or update beneficiaries. As a nonactive participant, you may also incur higher fees and receive less-effective plan communications than active employees.

However, you may want to consult with a financial advisor before liquidating your holdings if your previous employer offers a hard-to-duplicate investment option.

Roll it over

Rolling over your savings into your new employer’s plan can help avoid potential downsides of staying with the old plan or tracking multiple plans. But before taking this step, review the investment options and fees of your new employer’s plan. Also quantify any “after tax” contributions made to the plan. After tax contributions can be separately rolled into a Roth plan or IRA.

Beware of fees or charges you may incur when rolling your old plan balance into your new plan. If there are fees, you might want to keep your existing savings in the old plan or roll your account balance into an IRA while contributing to your new employer’s plan.

If a rollover into your new employer’s plan seems the better option, confirm that the plan accepts rollovers. When rolling over, never take the money; have the assets moved between administrators. Request a direct “trustee-to-trustee” rollover to avoid taxes. Otherwise, your old employer will mail a distribution check to you, minus a mandatory 20% tax withholding. You then have just 60 days to deposit these funds in your new plan. You also must cover the 20% that was withheld for taxes with other funds to achieve a 100% rollover.

Finally, if you fail to meet this 60-day deadline, or if you don’t have the cash available to cover the taxes that were withheld, you must pay income tax on the amount that wasn’t rolled over. If you’re under the age 59½, you may incur a 10% early withdrawal penalty.

IRA transfer

IRAs typically provide a much wider array of investment options than most 401(k) plans. Many financial services companies will accept a direct transfer of your retirement savings, which can streamline the process and avoid potentially costly mistakes.

In some cases, your assets can be transferred “in kind,” meaning you don’t need to sell certain investments to hold them in your IRA. Be aware, however, that you may be charged an annual fee after rolling your savings into an IRA.

Cash out

Unless you need the money to pay bills, consider the tax consequences before cashing out your retirement savings. Distributions will be taxed as ordinary income and, if you’re under the age of 59½, you may have to pay an additional 10% penalty on any withdrawals.

There are exceptions to the penalties — for example, in cases of economic hardship or if you separate from service at age 55 or older. But even if you qualify for an exception, you’ll owe ordinary income tax on the distribution.

Protect the egg

Don’t let job-switching activities distract you from protecting your nest egg! If you have a loan from your retirement plan, the balance will be due upon departure from employment. If not repaid, the balance will be taxable to you immediately. Contact us for help.

About HoganTaylor Wealth

HoganTaylor Wealth provides an integrated approach to investment and financial planning and is a registered investment advisor and subsidiary of HoganTaylor LLP. HoganTaylor Wealth takes its fiduciary responsibility seriously. Without commission, referral or soft-dollar arrangements, they operate on a fee-only basis to ensure everyone’s interests are aligned with those of the client.

INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.

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