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Come on, boy.
Rollover.
Good, 401(k)!
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Teach Your Money to Rollover
A Rollover IRA may be your best option when moving your 401(k)
by John Sneddon, CFP
If you’re changing jobs or getting ready for retirement, there are some key issues you’ll want to address.
The first big decision you’ll probably face is what to do with the money in your employer’s retirement savings or pension plan. You’ll have several options, and an understanding of their tax implications is critical.
There are generally three approaches to handling a 401(k), 457, 403(b) or other type of retirement plan:
- Roll your retirement funds directly into an Individual Retirement Account (IRA),
- Leave your nest egg right where it is, or
- Take a cash distribution.
A Rollover IRA is the most popular route for several reasons:
- First, when you directly transfer your retirement assets into an IRA, you continue to defer income taxes on the money and avoid a potential early withdrawal penalty.
- You’ll have access to a much wider range of investments, which means more opportunity to diversify your investments and to adjust your portfolio.
You could leave your retirement savings in your employer’s retirement plan until required distributions begin. However, consider that doing so limits your investment options to those offered by the plan and may reduce your control over future withdrawals and distributions since they will be governed by the rules of your employer’s plan.
In most cases, the least attractive alternative is taking a cash distribution of plan assets. Current income taxes will be due on money that is withdrawn but not rolled over. What’s more, if you’re under age 59 1⁄2, you may be subject to the 10% early withdrawal penalty. Finally, 20% of the distribution will be withheld by your employer as a prepayment of your federal income tax. These taxes, plus the tax-deferred earnings you’ll forego, can make a cash withdrawal an expensive option.
Consult an Arizona Federal financial advisor* today to review your retirement plan. Call us at (602) 683-1000 to make your appointment.
*Not NCUA insured—not insured by the credit union—may lose value
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