Is a rollover in your future?

Published 9:04 am Saturday, January 17, 2009

Have you recently left one employer to begin working for another? Were you covered by an employer sponsored retirement plan, such as a 401(k)? If so, you may be wondering about the future of your account.

In the event of a job change, there are many options available to you regarding your employer sponsored retirement account assets. The options you have will depend on the provisions of our former employer’s plan. Sometimes your money can stay in the plan with your previous employer until you reach a specific age and you then can begin taking withdrawals without a tax penalty.

Remaining with your old plan may have drawbacks. Sometimes fees are charged to former employees to offset managing the account. A minimum asset balance may also be required. Other times you must take your money out when you terminate employment. You should contact the Human Resources department or benefits counselor of your former employer to determine your options. If you withdraw plan assets, you may need to find another funding vehicle.

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Transferring the balance of the assets in your previous employer’s tax-qualified account to a plan sponsored by your new employer may be an option. This can be done without paying taxes if the money to the new account (known as a “direct rollover”). However, your new employer may not allow a rollover, thus you will need to look at further options.

One choice to consider is rolling the balance of your account to a Traditional Individual Retirement Arrangement (IRA). With this choice, you are able to control the investment options within the IRA. You can also avoid the need to make a further rollover if you change jobs again. Rolling your 401(k) assets into a Traditional IRA can be costly if not done correctly. If you take a withdrawal, the trustee of your old plan must withhold 20 percent of the money for federal income tax purposes. You have 60 days to roil the distribution to a new qualified retirement vehicle if you do take a withdrawal. The 20 percent withholding will count as a distribution if you do not roll over that amount to an IRA or other qualified plan. A 10 percent tax penalty will usually apply if you are under age 59 1/2 and you don’t roll the entire amount into an IRA or other qualified plan.

In order to avoid the 20 percent federal income tax withholding, a direct rollover should be considered. The assets of your employer sponsored plan are transferred directly from your former employer’s plan to a Traditional IRA or other qualified plan. You don’t touch the money, and neither does the government. Your assets can grow tax-deferred until you begin withdrawals.

To complete a direct rollover, contact a State Farm agent to discuss your options. Once you determine where you want the money to go, the IRA custodian can request the money from your employer-sponsored plan in the form of a check or wire transfer.

Your current IRA contributions are not affected by a rollover. You may contribute the allowable limit to an IRA even after rolling a substantial amount from your previous plan.

With so many choices available, it may be in your best interests to discuss a Traditional IRA rollover with a financial professional You have some options. Take advantage of one with which you are comfortable.

Dave Klatt is a State Farm Insurance agent in Albert Lea.