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FAQ - 401k & IRA

To Roll or Not To Roll… it’s important to understand your options!

If you are changing jobs or retiring, you must make the best decision on what to do with your employer sponsored retirement plan, such as 401(k), 403(b), and 457 accounts, here are a few questions you should ask your financial professional:

What will I be entitled to?

You are entitled to a distribution of your vested balance, which includes your own contributions (pretax, after-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

Why shouldn’t I just withdraw my money from the 401(k)?

If you take a distribution the entire value of your account, less any after-tax or Roth 401(k) contributions you’ve made, will be added to your taxable income for the year and taxed at ordinary income tax rates. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. Let’s assume your income is $75,000/year and your 401(k) value is $125,000. If you were to take a full distribution of $125,000, you’d have to report income of $200,000 to the IRS on your tax return. This could affect many things from financial aid to Medicare premiums, not to mention the $70,000 in taxes you’d have to pay (assuming a 35% tax bracket).

Can I just leave the money in the 401(k)?

If your vested balance is more than $5,000, you can leave your money in your employer’s plan until you reach normal retirement age. But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan.

This is NOT recommended!

What happens if I received a check and change my mind?

Your employer will withhold 20% for taxes; however, you have 60 days to roll your money into another retirement account, such as an IRA or your new employer’s 401(k). If you don’t roll it in 60 days, you will be responsible for taxes and penalties as described above. You will also be taxed on the 20% that was withheld by your former employer.

Why would I roll it into an IRA?

An IRA provides more flexibility with distributions, such as timing and amount. A 401(k) usually does not offer these options.

Why would I roll it into my new employer’s 401(k)?

Fees expenses and loan provisions vary between 401(k) plans. You and your financial professional should compare your investment options against the cost. Most 401(k) plans receive unlimited protection from creditors and bankruptcy under federal law.

How do I decide which option is best for me?

West Financial Group would be glad to assist you in this process. There is so much more to consider in order to make the right decision for your specific situation, call us today for your free consultation.