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Take it or leave it? As we move from job to job, we often leave behind our 401(k) retirement plan balances. Although you may not have to move your retirement plan funds, it's important to explore whether it's in your best interest to consolidate them.
Reasons you might want to consolidate old 401(k) and similar retirement plan accounts in a rollover Individual Retirement Account (IRA) may include:
Reasons to leave 401(k) balances with your old employer(s) may include:
Keep in mind that, in addition to leaving your 401(k) with your old employer or rolling it into an IRA, there are two other options: You might be able to move the money into your new employer's retirement plan–or you could cash out the plan balance. Be warned: Cashing out can be costly, because you will likely trigger both income taxes and tax penalties, depending on your age.
If you decide to consolidate your old 401(k) balances in a rollover IRA, not following the rules could be very costly. For example, if your former employer mails you a check in your name with your 401(k) balance, it could trigger losses as a result of unnecessary taxes and penalties if the check is not deposited into a qualified retirement account within 60 days of distribution.
What would happen? You would receive a check for just 80 percent of the balance, with the other 20 percent withheld for taxes. You can reclaim that 20 percent on your next tax return, but only if you roll over 100 percent of your old 401(k) balance to an IRA within 60 days of receiving the distribution from your old employer. To do that, you'll need to find the extra 20 percent elsewhere, so you can roll over the full 100 percent. If you can't find the extra cash, the money not rolled over would be considered a taxable distribution–and you'll owe income taxes and possibly a 10 percent tax penalty.
To avoid this risk, try to arrange a direct rollover (also called a trustee–to–trustee transfer) from your 401(k) to your new IRA. You may need to get an IRA rollover form from your old employer. Also check with your new IRA provider—most likely a bank, brokerage firm, or mutual fund company—to see what information they need to accept the rollover. You still might receive a check in the mail, but it should be made out to the IRA provider for the benefit of you.
Another item to keep in mind: If you hold company stock in your 401(k), you may be able to pull the stock out of the 401(k) and, when you later sell those shares, pay taxes on any appreciation at the long–term capital–gains rate. That rate may be lower than the income–tax rate usually paid on retirement–account distributions.
The net unrealized appreciation tax strategy for company stock isn't right for everyone. For instance, it triggers an immediate income–tax bill, possibly including the 10 percent tax penalty, on the stock's cost basis. That tax bill may wipe out other tax benefits. Again, consider consulting a tax advisor on premature distributions if an exception doesn't apply.
In many cases, you are not required to act immediately upon switching jobs or retiring. The decision to transfer funds out of an employer's plan is irrevocable. Before making a decision, take time to assess factors such as your age, financial needs, personal situation, fees and expenses, investment options, and services.
IRA Rollovers. Unlike employer retirement plans, IRAs have different rules on rollovers, including that you can only roll over one IRA distribution per year.
To learn more about rollovers, speak with one of our Citi Personal Wealth Management Financial Advisors.
The transfer, rollover, and withdrawal of retirement assets in IRAs, 401ks, and other types of qualified accounts are governed by specific rules and laws and may involve significant tax consequences and limitations. Before making any decisions regarding the disposition of your retirement accounts, please consult your tax advisor or accountant.
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