March 2, 2021

If you have changed jobs and are looking for a way to move your assets from your previous workplace’s savings plan to an individual retirement account, you may want to do your research first before committing to the rollover. This will help individuals avoid making costly errors and stop them from locking themselves into a move that can’t easily be undone.

Both 401(k) plans and IRAs were implemented as ways to let individuals put away tax-advantaged savings for retirement. Here are several rules that differ between both options and what to be aware of before initiating a rollover.

Rolling over your 401(k) or IRA

If you have determined that you are going to move your retirement into an IRA, taxpayers should avoid having a check sent directly over to them from their previous 401(k) plan. If your rollover account is set up and ready to receive the funds from your 401(k), the check should be made out directly to the IRA custodian for the benefit of you.

If the check has been made payable to you, it will be considered a distribution meaning that your 401(k) plan is required to withhold 20% for taxes.

If you have company stock

There are some retirement investors that hold company stock in their 401(k) in addition to their other investments. Should you choose to roll over all your assets into an IRA, you may lose the potential to receive much more favorable tax treatment on any additional growth those shares had when they were in your 401(k).

If you choose to sell the shares from your brokerage account, any growth the stock has experienced from your 401(k) would be taxed at long-term capital gains rates based off your income.

The rule of 55

For those who left their job in or after the year you turned 55 but before the age of 59 ½, you have the ability to take penalty-free distributions from your 401(k). If you decide to move your money into an IRA, you will lose the ability to have immediate access to your money.

If you have already rolled your money over from your 401(k) into an IRA but need access to it right away, you will end up paying the 10% penalty unless you can qualify under another reason for an early withdrawal.

Optima Tax Relief provides assistance to individuals struggling with unmanageable IRS tax burdens. To assess your tax situation and determine if you qualify for tax relief, contact us for a free consultation.