February 3rd, 2010 
Vijaianand Lost your job and wondering what happens to your 401k or employee sponsored savings?
Getting bombarded by calls/ads/emails from financial firms to rollover your 401K fund?
Many Americans are facing the same situation and asking similar questions as more than 4 million lost their job last year. After losing a job, you don’t think about 401k for a while because you are busy hunting for the new job. With job market still in limbo land, many people are having tough time finding any job and struggling to feed their families. In this situation, they are looking for options to earn and even willing to break their nest egg to get through the current situation and worry about retirement later.
In my last post, I stressed the importance of timely action on your 401K before it’s too late whether you decide to save or take out distributions. How you handle your 401-K account can result in anywhere from zero to hefty taxes and penalties. This blog post, I plan to share few important questions and answers with my research, study and experience in rolling over 401K during the job change 2 years ago.
First question, What are my options?
There are several options when it comes to saving your 401-K and your former employer or 401k administrator from investment company should have already provided you with information. If not, here are some important options:
1. Stay In
You can stay put with the former employer plan unless there is no restrictions and limitations.
Pros: No Paper work, Low fees, Better investment options, money grows tax deferred.
Cons: Higher fees, no contribution from employer, no flexibility, less attracive plans and importantly minimuim balance requirement. ($5000 most cases)
2. IRA Rollover
Next comes the IRA Rollover which is highly recommended and advertised in the past year by lot of brokerage and mutual fund companies. It is easy and has lot of advantages.
Pros: No penalty or Income tax when rolled over directly, tax deffered growth, more investment options, Direct control over money, great flexibility to change funds any time.
Cons: 401K security value might be down because of stock market and lose money by rollover since they need to cash the security before rolling over. Also usual IRA withdrawal rules apply.
In general all the contribution by you and vested employee portion in the 401K plan is eligible for rollover. A rollover can be paid directly to you or it can be implemented as a direct rollover.
Direct Rollover: The funds in your 401-K account are paid directly into the IRA. With a direct rollover, the 401-K administrator is not required to withhold any income tax and you do not owe a penalty. It has become easy with Internet and many companies allow internet application submisions.
Check Payment: Many 401K administrators send check directly to you if they havn’t heard with 60 days. When you receive your 401-K distribution, your former employer has withheld 20% as taxes. This withholding is a requirement. It does not mean you will owe the tax. In order to avoid taxes and tax penalty you must: 1. Deposit full amount including the 20% withheld by employer with your funds into your IRA account within 60 days of receiving the funds. When you file your taxes for the year you will not owe taxes on your rollover, but will be able to include the 20% withheld as income tax paid.
If you do not pay full amount, you will owe Income taxes at your current tax rate on the amount of 401-K funds you did not rollover plus additional 10% tax penalty is due because you received retirement funds before you reached 59-1/2.
Because of above complications direct rollover is less risky, faster, less time consuming and not as complicated as a payment made to you.
3. Rollover to New Employer 401K Plan
You can also choose to wait and roll over to your new employer 401 plan depending upon your situation. That helps to keep all your 401k money in one place. But you have to find the job on time and also you have to satisfy balance requirement to keep funds in the former 401k plan. You might endup paying higher fees during the interim period. Be aware of it and make decision.
4. Rollover Annunity
You can rollover to Insurance companies annunity option. A Rollover Annuity is a contract between you and a life insurance company that allows you to specify how you want to receive future income, and even elect a death benefit for your beneficiaries. Your money transfers to the annuity and earnings, if any, will continue to grow tax deferred until withdrawn.
Pros: No penalty or Income tax when rolled over directly, tax deffered growth, more investment options, Direct control over money, great flexibility to change funds any time and decide how your income will be paid.
Cons: If elected to get immediate withdrawal and below 59 1/2, penaly applies
5. Lumpsum Cash Out/Distribution
It is not recommended option but if you are above 59 1/2 age limit you can take out the money without any penalty and taxes implications. But when you don’t find job and need to take care of the family, this has become only option for many people. SO if you cashing out 100,000 and you are in 25% tax rate, you would end up paying 25,000 + 10% penalty would be $35,000 loss.
Pros: Instant money from nest egg
Cons: Need to pay Income Tax if you are younger than 59 1/2 upto your tax rate + 10% penalities.
6. Safe Harbor Hardship Withdrawals
If you don’t wish to take out full amount, you can always withdraw certain portion using the hardship withdrawal requirements. In this bad economy, uncle sam allows certain withdrawals (listed below)but still might need pay income tax and 10% penalty. Also funds are limited to the elective portion of the deferral, and not any income or interest on the deferred amounts. It might help to overcome the situation and not a bad option in worse situations.
Check
401khelpcenter.com for more info.How easy is to rollover to an IRA Account? It has become real easy these days, thanks to Internet. It took just a month to transfer my funds from ING Retirement account to TRoweprice Mutual fund IRA account. Not much paper work, all forms filled out over the internet and it all happened electronically. The process has gotten simpler with many investment companies so you shouldn’t be worried. Steps to follow,
1. First determine which company to rollover (brokerages, banks&mutual funds)
2. Select the securities or funds to invest on
3. Check on the application process and timings
The answer to this questions depends on, what do you want to do with the money? Whether you want to invest in stock market directly and actively trade them or invest in mutual funds/index funds with the help of fund company or you want investment company to manage it for you. Depending on your selection, you path changes.
Once you understand the procedures for opening and funding your IRA, you are ready to begin the rollover process. If your IRA’s financial institution requires you to open an account before funding with a rollover (as opposed to simultaneously opening and funding), then submit the IRA application first.
Can I use Rollover offers? Yes, there are plenty of rollover offers recently by brokerage and mutual fund companies. I was able to gather some offers: TDAmeritrade – Free $500 give away for rollover with some restrictionsTRoweprice – Easy rollover and guidance
ING IRA Rollover – Free Transaction for life (for only ING funds)
Please use the above information as guideline purpose only and do verify with your contacts. Please read all of your 401-K and IRA documents and address any questions you have to your former employer and the financial institution for your IRA. Don’t hesitate to consult a financial advisor or tax consultant.
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