401K Rollover Taxes

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					Beware: The 401(k) Rollover

Everywhere you turn these days you see bank marques, brokerage ads, and advisors begging you to
come in to “rollover” your 401(k) into an IRA. Granted there are several reasons for moving your
retirement plan from your employer. Retirement, changing jobs, and taking advantage of a recent
IRS provision that allows you to move your funds into an IRA, even before you retire or even reach
age 59 ½ (plan restrictions may apply) are but a few.

But a “rollover” is the least desirable way to move these funds. The first “gotcha” from a 401(k)
rollover comes when your plan administrator withholds 20% required by the IRS. Not only will the
net coming to you be reduced but you lose the tax deferral on that amount going forward and you
must now pay taxes on that 20% as well.

The next “gotcha” comes when you miss the 60 day window the IRS gives you to put those funds
back into another qualified plan, either another 401(k) or an IRA. If this happens you have lost all
tax deferral on the entire amount of the withdrawal and all of those funds will be considered income
and fully taxable at your current tax rate.

And the final “gotcha” comes when you “rollover” your 401(k) as a 10% penalty or excise tax for
early withdrawal if you have not reached 59 ½ years old. The IRS is very unforgiving when it
comes to these rules and regulations governing your 401(k). So you had better get it right upfront or
you will suffer the consequences.

You can accomplish the same results without all the penalties, taxes or withholding by doing a
trustee to trustee direct transfer. This way you never touch the funds and you maintain the full tax
deferred status of your entire account. So be sure this is handled properly and don’t be “tricked”
into having your 401(k) rollover costing you thousands. All it takes is checking the wrong box and
you will have opened Pandora’s Box.

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