401K or Rollover IRA? : Issues to taxes and penalties could total 44%
Consider (10% early withdrawal, 28% federal tax,
6% Missouri tax). This doesn’t include
Liz H. Cauble, CFP ® and possible local tax.
Have you changed jobs or retired and Another consideration is the opportunity
left money in a qualified company cost of not leaving your money growing
retirement plan? This asset could be the in a tax deferred account. For example,
largest source of your financial support a $50,000 balance left to grow at a tax-
during your retirement. If you are deferred 8% annual return over 25 years
eligible to take a distribution from your would amount to $342,400. It would
plan, you should understand your take $67,675 in a taxable account at an
options and the tax consequences after-tax return of 6.7% to grow to this
involved before you make any same amount starting today. Taking
withdrawals. your distribution as cash should only be
used as a last resort.
You have four choices when you leave
your employer. Issues to Consider:
Taking Cash Distribution
1. Take your distribution as cash Pros Cons
2. Leave assets at a former employer Immediate Cash Penalties & taxes
3. Move the assets to a new employer, Loss of tax deferred
4. Roll the assets into an Individual
Retirement Account (IRA).
Leave the Assets Where They Are With
Cash Distribution Former Employer
Taking your account balance as a cash If the plan allows it, leaving your assets
distribution can provide you with right where they are can be a convenient
immediate cash, but it is rarely a good option if you are happy with the
idea. investment vehicles offered by the plan.
You could lose nearly half of your You avoid income taxes and potential
balance to taxes and penalties. If you penalties and your investment continues
take a cash distribution before you are to grow tax-deferred.
age 59 ½ (or age 55 with a separation of
service), you will probably incur the A qualified employer plan, such as a
mandatory 10% early withdrawal 401K plan is governed by ERISA and
penalty. Since the distribution is thereby given the highest level of creditor
considered ordinary income, you will protection. Protection available to IRA’s
also incur federal, state and local income is governed by state law and varies from
taxes including a mandatory 20% federal state to state. However, a 2005 U.S.
withholding at the time of distribution. Supreme Court ruling (Rousey v.
For a $50,000 withdrawal, total possible Jacoway, 03-1407) shields traditional
IRA assets in bankruptcy when the funds If Plan allows, may
are found reasonably necessary for the be able to borrow
account holder's or his/her dependents' against
support. In addition a 2005 federal NUA distribution
bankruptcy reform law protects up to $1 option for highly
million held in traditional and Roth IRAs
Move your Assets to Your New
You may be allowed to borrow against
the value of your account depending on
plan rules. Also, keeping your money in
Rolling your assets into your new
your employers plan may give you more
employer’s plan has many of the same
flexibility if you want to contribute to the
advantages and disadvantages as leaving
plan in the future. If you have highly
the assets with your former employer.
appreciated employer stock or if you
You avoid incurring taxes and penalties
were born in 1936 or before, you may
and your funds continue to grow tax-
qualify for special withdrawal strategies
deferred. You also may continue to have
only available through a qualified plan.
the ability to borrow against your
You are also eligible to roll the funds to
balance. An additional benefit is
and IRA at a later date.
Downsides to consider are that you may
Generally you can move pre-tax
have better investment choices available
contributions and earnings from your
to you through a rollover IRA. You may
existing retirement plan into the new
also be restricted in making changes to
plan. As for after-tax contributions, you
your investment choices in the company
will need to check the rules of your new
plan. Finally, withdrawal options for you
plan to see if they are allowed. You can
and/or a beneficiary are more limited
roll your after-tax contributions into an
than with a rollover IRA.
IRA, but note that after-tax contributions
may not be rolled from an IRA back into
Issues to Consider: a qualified plan.
Keep Assets in Former Company Plan
Pros Cons Disadvantages of moving the funds into
Convenience May have better
a new employers plan include that you
in a rollover IRA
are restricted to the investments
Avoid taxes and Potential restrictions available in the new plan and withdrawal
penalties in making changes options and the ability to change your
to investments investment choices may be restricted for
Continue tax- Fewer withdrawal you and your beneficiaries.
deferred growth options for you
Highest level of May not access
creditor protection funds for first home
purchase or medical
Issues to Consider: account fees, instead of your employer
Roll Assets to New Company Plan and you cannot borrow against an IRA.
Pros Cons Also, if you have highly appreciated
Convenience More investment company stock in the plan, special
choices in a rollover distribution options such as Net
IRA Unrealized Appreciation (NUA) and
Avoid taxes and Potential restrictions forward averaging are not available to
penalties in making changes you once the stock is distributed to an
IRA. Creditor protection may be greater
Continue tax- Withdrawal options
deferred growth for you and/or
with a qualified company plan. Creditor
beneficiary less than protection of traditional IRA’s and Roth
IRA IRA’s is governed by state law. Beyond
Highest level of May not access state law, traditional IRA assets are
creditor protection funds for first home generally protected from creditors to the
purchase or medical extent the funds are found reasonably
expenses necessary for support. Traditional and
If Plan allows, may Roth IRA assets are protected only up to
be able to borrow $1,000,000 under federal bankruptcy
against funds laws.
Roll your Assets into an Individual Issues to Consider:
Retirement Account (IRA) Roll funds into a Rollover IRA
Rolling your investments into an IRA Investment options Creditor protection
allows them to continue growing tax almost unlimited depends on state
deferred while also allowing you to law
avoid income taxes and penalties on the Easier access to You may be
transfer. Your investment choices are retirement funds responsible for
almost unlimited with an IRA and you account fees
have more control over your investments May be converted to You cannot borrow
allowing you to develop an investment a Roth IRA, if you against IRA funds
strategy based on your own needs.
Tax deferred growth No NUA or forward
This option offers you easier access to Penalties and taxes
your investments and maximum avoided
flexibility as you can, with certain If you qualify, funds
restrictions, roll these assets into another for first home
employer’s plan or convert to a Roth purchase, higher
IRA at a later date. Withdrawal options education, medical
can be more flexible than with company insurance and
plans, and estate planning is easier and unreimbursed
more flexible with rollover IRAs. medical expenses
May be able to roll
Some potential drawbacks are that you into employer plan in
the future, if certain
will be responsible for any potential
restrictions are met
This discussion is meant to be an We recommend that you discuss your
overview. The tax laws governing options with a trusted advisor.
qualified plans and IRAs are very
complicated and your decision should be Liz H. Cauble, CFP ® August 2007
based on your specific circumstances. firstname.lastname@example.org
Cash Leave with Move to New Rollover IRA
Distribution former Employer Employer Plan
Highest level of
Cauble & Harre Wealth Management, Inc. is an independent wealth management firm and a
Registered Investment Advisor in the state of Missouri.
Cauble & Harre Wealth Management, Inc.
12977 North 40 Drive, Suite 213
St. Louis, MO 63141
This article is for informational purposes only. It is not in any way a solicitation or offer to sell securities or investment
advisory services except, where applicable, in states where Cauble & Harre Wealth Management, Inc. has made notice
filings or where an exemption or exclusion from such filing exists. Material in this document has been taken from
sources we deem reliable, but we do not guarantee the accuracy of the information. Past performance is not indicative
of future results.