At some point, many people with retirement or employer-sponsored investment accounts will be faced with the decision of what to do with rollover funds. This can happen when you change jobs and cash out a 401(k), or when you retire. In either case, it’s important to think through your options. Ideally, it’s best to choose a strategy that meets your retirement needs, minimizes the impact of taxes, and avoids penalties.

Please note this is a general overview, and tax laws can be tricky, so be sure to talk to an accountant and/or tax attorney before making any financial decision.

Roll it over.

One possible option is to directly roll your entire distribution into a new Individual Retirement Account (IRA) or an employer-sponsored 401(k). Either one would allow you to continue to defer taxes and enable you to continue building your retirement savings for the future.

Leave it where it is.

You may want to keep funds in your employer’s plan until you reach the plan’s retirement age, if that’s an option. This may be ideal if you want to take advantage of certain investment options or managed money services available in your existing plan. Your funds will remain tax-deferred and can later be moved to a new employer’s qualified plan or an IRA.

Take the taxable distribution.

Depending on your situation, you may choose to withdraw the funds from your 401(k). Although you will have immediate access to your savings, there are a few things to consider when taking a lump-sum distribution.

First, your money will no longer have the potential to grow tax-deferred. Second, it will be subject to ordinary state and federal income taxes. Additionally, if you are under age 59½, a 10% IRS penalty may apply. 

Please note: Rollovers must be completed no later than the 60th day after the day you receive the distribution.

Frederick will also be holding a financial education workshop at Isadore’s in Manteca on Thursday, March 13, 2 at 5:30 p.m. The main topic discussed will be on how to accumulate and distribute wealth in a tax efficient manner. If you would like to attend please RSVP to Fred at (559) 447-3604 as seating is limited. There is no cost to attend and is for educational purposes only.