You are quickly approaching your retirement or you have already arrived. What happens with all those contributions both you and your employer have made to your 401(k)? do you do a rollover 401k?
An individual basically has two options. You can keep it with the company or opt for the rollover 401k. However, consider some of the ramifications for the rollover 401k.
Under an Individual retirement account, you can invest your earnings in a variety of options. It puts you in a position of total control. However, money that leaves your IRA is subjected to ordinary income tax costs which can be as high as 35% and not in the lower capital gains rates. And you will pay an additional 10% punishment tax for taking distributions before you decide to turn 59½, unless you qualify for any hardship withdrawal or other exception.
Or, you can forgo the particular rollover 401k and leave your retirement funds with your company and also take out your yearly sum and pay taxes on it. But unless you are Fifty-five or older, you will pay a steep penalty on what you take.
However, there is another way which may be advantageous with your situation. It uses both these types of options, but with an advantage. If you have a lot of the company's stock in your 401(k) along with contributions, you can reap the benefits of paying the lower capital results rate on the net unrealized appreciation (NUA) of the stock.
To do this, you will need to separate rollover 401k into a business stock part and everything else. Now take the 'everything else' part and also do your rollover 401k. Get your company to transfer the money straight to your IRA - rather than to you first.
If you have the organization pay it to you, 20% will be withheld for tax reasons. And then if you want to preserve a no tax transfer, you will have to actually complete the rollover 401k inside 60 days and include that 20% withheld, but it will be paid out of your wallet. You will get that 20% that was withheld, regarding Uncle Sam, when you do the taxes for that year. Obviously, that is the hard way to consummate the particular rollover 401k.
The stock that your company has issued you as part of your 401k, can be taken as a lump sum payment within that tax calendar year. On the amount originally dedicated to those shares, you will pay regular income tax today. But afterwards, you will pay tax on the unrealized appreciation, but it will be at the capital gains rate (currently 15% federal government).
Lose a Fortune on Your 401k Rollover
If you do not do any of these correctly:
- Opt for a distribution rather than direct transfer
- Rollover company stock to an IRA
- Choose to rollover to a Roth IRA
- Rollover to your new employer’s 401k
- Rollover post-tax contributions