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401(k) Rollovers

by Mike Stapleton

401(k) rollovers

401(k) Rollovers or Cash Out?

With all the layoffs and business closures due to Covid19 I thought it would be good to share some options you may have, with regard to your old 401(k). The most popular option is 401(k) rollovers, which I go over in the second paragraph. However, some people opt to cash out. If you’re 59 1/2 or older, and you lose your job, you can take withdrawals penalty free. However, you’ll still be required to pay the taxes. Most brokerages will withhold 20% for federal taxes. If you’re younger than 59 1/2 you’ll be charged a 10% penalty for withdrawing the money prior to the minimum age. If you’re willing to take the tax hit it’s certainly an option to cash out.

Another option is a 401(k) rollover. 401(k) plans can be rolled over to a Traditional IRA, within 60 days of closing the account. This is done without charging any taxes or penalties. Most brokerages will set up a new IRA. The proceeds from your old 401(k) will then be wired to your new IRA, or sent via a check mailed to you or your new brokerage. Rollovers can also be done by converting your old 401(k) into a Roth IRA; however, you’ll need to pay the taxes in the year you do the rollover. Roth IRA conversions need to be done a specific way to avoid unnecessary taxes. They need to be a ‘Trustee to Trustee Transfer” also known as a Broker to Broker transfer. The taxes paid on a Roth IRA conversion are at your typical income tax rate. Another important note is that, you’ll be penalized if you take the money out within 5 years of depositing your rollover.

See Mike Stapleton, Clearwater, Financial Advisor, at Edward Jones for a detailed analysis of your particular investment needs. Mike is a licensed Investment Advisor in the State of Florida.