Unfortunately, one of the negative consequences concerningCOVID-19, is a sharp increase in the number of unemployed people. The globalpandemic has caused a great deal of uncertainty within the business community.This will lead to a large number of job losses, at least on a temporary basis.If you find yourself out of a job, one of the most important things you can dois to thoroughly examine all of the options concerning your 401(k).For manypeople, the balance inside their 401(k) represents a substantial portion of anindividual’s retirement plan.Therefore, it becomes critically important to makethe proper decisions in terms of how to handle your 401(k), particularly if youbecome unemployed.
One of the most common questions among 401(k) participantsinvolves the transfer (i.e. rollover) of 401(k) assets. This is a particularlyfrequent question because the rollover rules have changed during the past fewyears. Another reason why this topic is so popular is because there seems to besome confusion within the investment community concerning rollovers, transfersand withdrawals. Very briefly, let’s review the specific rules in regard torollovers and transfers.Please read the following example.
Jane was recently laid-off by her employer. Thankfully, Jane has alarge 401(k) balance of $250,000. She also has a second 401(k) from a previousemployer. The balance is $35,000. Upon speaking with her employer, Jane hasdetermined that she will not be returning to work any time in the near future.Therefore, she has decided to transfer her large 401(k) balance into an IRA.Jane contacts the 401(k) custodian and asks the custodian to send her a checkfor the balance of the account ($250,000). The funds are sent directly to Janein the form of a check. This is known as an indirect rollover. In order toavoid fees and penalties, Jane has 60 days to send the entire 401(k) balance toher new IRA custodian. She successfully deposits $250,000 into her new IRAwithin the 60-day window.
Jane is happy with her new IRA custodian. Therefore, a few monthslater, she decides to transfer the small 401(k) with a balance of $35,000.Within two weeks, Jane receives a check for $35,000. She subsequently mails acheck payable to her new IRA custodian. Unfortunately, Jane has made a costlymistake. Why? Because the IRS allows only one indirect rollover per 365-dayperiod. This new law went into effect on January 1, 2015. Jane’s entire balanceof $35,000 becomes 100% taxable. Effectively, the account is no longerconsidered an IRA. Jane made a mistake because she was not familiar with therollover rules. Most likely, she could have avoided this taxable event byspeaking to a licensed investment professional. Licensed professionals arefamiliar with rollover and distribution rules. They help their clientsdetermine the proper strategy for transferring retirement accounts.
In the example above, Jane chose to use an indirect rollover fortransferring her 401(k). She also had the option of selecting a directrollover. What is a direct rollover? It’s a transfer option which allows forthe movement of retirement dollars. More specifically, a direct rollover is anelectronic transfer of retirement accounts between two custodians. With adirect rollover, the owner of the retirement assets does not receive a checkfrom the custodian. More importantly, there is no limit on the amount of directrollovers that can be initiated in a 365-day period.
In regard to Jane, a direct rollover would have been a much betteroption. Why? Because she could have completely avoided the taxable event on her$35,000 401(k). Jane made the mistakeof performing two indirect rollovers inless than 365 days. By speaking with a licensed investment professional, Janewould have learned the difference between a direct rollover and an indirectrollover. Jane and her advisor could have discussed the appropriate course ofaction concerning her two accounts. In addition, by rolling over your 401k toIRA will provide more investment options.
Do you have questions concerning your 401(k) rollover? If so, youmay want to speak with Angelica Roxas.Angelicahas been licensed as an investment professional for almost 20 years. She is aFinancial Strategist and President of Strategic Asset Preservation, Inc.Angelica is also the Founder and President of South Bay Tax Solutions. She isan expert in helping clients make the best decisions concerning their 401(k)assets. Ask Angelica about her Market Loss Recovery Program, which is designed to help clientswho are struggling with their 401(k) investments.
If youwould like to meet with Angelica at no cost or obligation, she will be happy toreview your financial situation. Angelica’s phone number is (424) 247-1120 oremail at angelica@strategicassetpreservation.com. Visit us at: www.strategicassetpreservation.com.