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
do not hesitate to call us with questions or comments as we are
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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
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
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
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
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
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