Changing jobs? You’re probably wondering what to do with your old 401(k). Most people assume it’s a simple decision. It’s not.
Three Choices, Countless Ways to Go Wrong
You can leave money in an employer plan, cash it out, or roll it over to an IRA. Each option has tax consequences, and the rules keep getting more complex with every new piece of legislation. One wrong move can cost you thousands in unexpected taxes and penalties.
Mistakes You Can’t Undo
Consider the 60-day rollover rule. If you take a distribution and don’t deposit it into a new retirement account within 60 days, you owe taxes on the entire amount — plus a 10% penalty if you’re under 59½. Miss the deadline by even one day, and you’re stuck.
Worse, you’re only allowed one 60-day rollover in any 12-month period. Do a second one by accident? The IRS has no authority to fix it. That money becomes taxable income, period.
Here’s another trap: if your old 401(k) balance is too low, the plan may automatically cash you out and mail you a check. Now you’re on a 60-day clock you didn’t ask for, and 20% has already been withheld for taxes.
Hidden Factors Most People Miss
The right choice depends on details that aren’t obvious:
- Your age matters. Leave your employer at 55 or older, and you may access that 401(k) penalty-free. Roll it to an IRA, and you typically wait until 59½.
- Creditor protection varies. Federal law protects employer plans. IRA protection depends on your state.
- Beneficiary rules differ. How your heirs can access inherited retirement money depends on where you keep it and how it’s structured.
- Tax strategies exist that you may not know about. Roth conversions, Net Unrealized Appreciation on employer stock, and timing strategies can save significant money — but only if you know they’re available.
The Cost of Getting It Wrong
A single mistake can trigger a tax bill of 30% or more of your account balance. That’s not a typo. Between federal income tax, state tax, and the early withdrawal penalty, the damage adds up fast.
And unlike many tax issues, some of these errors have no remedy. The IRS cannot grant relief for certain violations, no matter how innocent the mistake.
Get Help Before You Decide
This isn’t a decision to rush. Before you do anything with your former employer’s 401(k), consult a Certified Financial Planner® professional who is also a member of the Ed Slott Master Elite IRA Advisor Group. CFP® professionals are legally required to act in your best interest. Ed Slott advisors specialize in retirement distribution rules and advanced tax strategies.
The guidance you get could save you far more than it costs.
Julia Peloso-Barnes, CFP® , is CEO/Sr. Wealth Adviser and Founder of Prism Planning and Solutions Group, a dba of Insight Advisors, a Registered Investment Advisor. .Julia is also a member of the Ed Slott Master Elite Advisor Group and has been helping clients seek empowerment through collaborative problem-solving for more than 30 years. Learn more here.
Neither Prism Planning and Solutions Group nor Insight Advisors provides tax or legal advice, and nothing in this communication should be treated as such. This communication should not be interpreted as a recommendation for a specific investment, legal or tax-planning strategy. We provide this material for informational purposes only. We have made every attempt to verify that the information contained in this communication is accurate as of the date published but make no warranties. Before making any decisions related to your own tax, legal and/or investment situation you should consult the appropriate professionals.   Â
Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, and CFP® (with plaque design) in the United States, which it authorizes use of by individuals who successfully complete CFP Board’s initial and ongoing certification requirements. Â
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