Did You Know?


March 15, 2016

Six Potential 401(k) Rollover Pitfalls

   You're about to receive a distribution from your 401(k) plan, and you're considering a rollover to a traditional IRA.  While these transactions are normally straightforward and trouble free, there are some pitfalls you'll want to avoid.

1. Consider the pros and cons of a rollover.  The first mistake some people make is failing to consider the pros and cons of a rollover to an IRA in the first place.  You can leave your money in the 401(k) plan if your balance is over $5,000.  And if you're changing jobs, you

     
 


   As a Registered Investment Advisor, Just Plans Etc. has a fiduciary duty to each and every client of the firm.  The policy of Just Plans Etc. is to protect the interests of each of the firm's clients and to place the client's interests first and foremost in every situation.
   The firm's fiduciary duty includes providing full and fair disclosure of all relevant facts and any potential or actual conflicts of interest, a duty of loyalty and good faith, providing recommendations that are suitable, and seeking best execution of all client transactions.

    4.  Remember the 10% penalty tax.  Taxable distributions you receive from a 401(k) plan before age 59 1/2 are normally subject to a 10% early distribution penalty, but a special rule lets you avoid the tax if you receive your distribution as a result of leaving your job during or after the year you turn age 55 (age 50 for qualified public safety employees).  But this special rule doesn't carry over to IRAs.  If you roll your distribution over to an IRA, you'll need to wait until age 59 1/2 before you can withdraw those dollars from the IRA without the 10% penalty (unless another  
       
   

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may also be able to roll your distribution over to your new employer's 401(k) plan.

  • Though IRAs typically offer significantly more investment opportunities and withdrawal flexibility, your 401(k) plan may offer investments that can't be replicated in an IRA (or can't be replicated at an equivalent cost).

  • 401(k) plans offer virtually unlimited protection from your creditors under Federal law (assuming the plan is covered by ERISA; solo 401(k)s are not), whereas Federal law protects your IRAs from creditors only if you declare bankruptcy.  Any IRA creditor protection outside of bankruptcy depends on your particular state's law.

  • 401(k) plans may allow employee loans.

  • And most 401(k) plans don't provide an annuity payout option, while some IRAs do.

2.  Not every distribution can be rolled over to an IRA.  For example, required minimum distributions can't be rolled over. Neither can hardship withdrawals or certain periodic payments.  Do so and you may have an excess contribution to deal with.

3.  use direct rollovers and avoid 60-day rollovers.  While it may be tempting to give yourself a free 60-day loan, it's generally a mistake to use 60-day rollovers rather than direct (trustee to trustee) rollovers.  If the plan sends the money to you, it's required to withhold 20% of the taxable amount.  If you later want to roll the entire amount of the original distribution over to an IRA, you'll need to use other sources to make up the 20% the plan withheld.  In addition, there's no need to taunt the rollover gods by risking inadvertent violation of the 60-day limit.

 

exception applies).  So if you think you may need to use the funds before age 59 1/2, a rollover to an IRA could be a costly mistake.

5.  Learn about net unrealized appreciation (NUA).  If your 401(k) plan distribution includes employer stock that's appreciated over the years, rolling that stock over into an IRA could be a serious mistake.  Normally, distributions from 401(k) plans are subject to ordinary income taxes.  But a special rule applies when you receive a distribution of employer stock from your plan:  You pay ordinary income tax only on the cost of the stock at the time it was purchased for you by the plan.  Any appreciation in the stock generally receives more favorable long-term capital gains treatment, regardless of how long you've owned the stock.  (Any additional appreciation after the stock is distributed to you is either long-term or short-term capital gains, depending on your holding period.)  These special NUA rules don't apply if you roll the stock over to an IRA.

6.  And if you're rolling over Roth 401(k) dollars to a Roth IRA . . . If your Roth 401(k) distribution isn't qualified (tax-free) because you haven't yet satisfied the five-year holding period, be aware that when you roll those dollars into your Roth IRA, they'll now be subject to the Roth IRA's five-year holding period, no matter how long those dollars were in the 401(k) plan.  So, for example, if you establish your first Roth IRA to accept your rollover, you'll have to wait five more years until your distribution from the Roth IRA will be qualified and tax-free.

 


 

 
     
Why Use An Advisor?

   People use financial planners because they don't have the time, interest, or ability to create a plan by themselves, or they do have the time and ability and want a second opinion.

   Clients of Just Plans are mostly of the first group, and are generally overwhelmed by the multitude of options with which they are confronted.  The #1 item most are concerned with is having an adequate retirement income.  Number two is funding their children's college costs.  While college costs can be paid from current income or monies accumulated beforehand, retirement income can only be provided by setting money aside ahead of time and investing it wisely.

   Our business is built on relationships.  We work with you to identify and quantify your objectives.  The first step involves gathering personal and financial information.  Goals are established and constraints identified.  Relationships prosper when expectations are realistic. Investments are based on what is needed to reach your goals, taking into consideration your ability to tolerate market volatility.

   When you choose to have us manage your investments, the accounts are 100% discretionary. We allocate portfolio assets to CDs, Treasuries, separate accounts, exchange traded and traditional mutual funds and individual stocks. Depending on the size of the account, up to 60% may be allocated to core holdings, with the balance allocated to industry specific or asset class specific positions. Monthly statements are provided by the custodian. Just Plans provides quarterly performance reports and we are available for personal reviews.

 
History

    In 1982 Just Plans was formed to provide investment products for retirement plans, and to provide financial counseling to business owners and retirement plan participants. The predecessor insurance firm (started in 1967) designed and implemented retirement plans for closely held businesses. It provided estate-planning strategies for the business owners, their key people, and other individuals.

   Just Plans refers to its services as "ABEL Strategy." Conceived in 1991, the concept was initially a non-discretionary investment account using no load mutual funds held at Charles Schwab & Co. A 1% fee was charged. The program is now 100% discretionary, using CDs, Treasuries, exchange traded and traditional mutual funds and individual stocks, with accounts at Schwab or TD Ameritrade.

   We can be a resource for any situation that has to do with finances. For services in which we do not specialize, we refer our clients to many other partner professionals and firms with whom we network.

Just Plans Etc., 1399 Ygnacio Valley Rd., Ste. #24, Walnut Creek, CA 94598          Tel:  925.988.0330     Contact Us
 

 

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