What Should I Do With My 401(k) Money?


A type of rollover is the tax-free transfer of money from an employer sponsored retirement plan to an IRA (Individual Retirement Account).  Examples of employer sponsored retirement plans are 401(k) plans, profit sharing plans, pension plans, and deferred comp plans.

When you retire or terminate your employment, you have several options for your vested money in all of your employer sponsored retirement plans.  One option is to simply have the money paid to you in what is referred to as a lump sum distribution.  A lump sum distributions may be fully taxable, State and Federal, in the year you take the distribution.  If you are not yet 59 1/2 years of age in the year you take a lump sum distribution, you may pay a tax penalty called a early distribution penalty which is in addition to the State and Federal income taxes.  Currently, the Federal early distribution penalty is 10% of the amount of the lump sum distribution and the California early distribution penalty is 2 1/2% of the amount of the lump sum distribution.  Taking a lump sum distribution is usually a very expensive option to choose because of the income taxes.  A lump sum distribution can place you in higher State and Federal income tax brackets in the year you take the distribution than where you would normally be.  As a result, a large portion of your hard earned retirement plan money will be lost to State and Federal income taxes.  Sometimes as much as 50%!

A second option is to do a tax-free rollover of all your funds from all employer sponsored retirement plans to an IRA.  A rollover will avoid immediate State and Federal income taxation of your retirement plan funds.  Inside of an IRA, your money will continue to enjoy a tax deferred status just as it did in the employer sponsored retirement plan(s).  If you need income, systematic distributions can be set up from your IRA.  You can choose monthly, quarterly, semi-annual, or annual systematic distributions.  You may be taxed each year only on the amount of the total distributions for the year.  The remainder of your money earns taxed deferred inside of the IRA.  And, whether or not you have systematic distributions set up, you can take an unscheduled distribution at any time you need money. 

By using the rollover option, you may minimize the amount of income taxes due each year as opposed to taking a lump sum distribution since you may be taxed only on the money withdrawn each year.  2Also, by rolling over your retirement plan funds into an IRA, you may have a full array of investments from which to choose including mutual fund, annuities, real estate investment trusts (REIT), unit investment trusts (UIT), stocks, bonds, etc. Some investments feature guarantees of your principal while allowing you to invest in the stock market or participate in an index such as the *Standard & Poor's 500 without fear of loss.  1All guarantees are based on the financial strength and claims paying ability of the issuing insurance company, who is solely responsible for all obligations under its policies.  

We have done many, many rollovers.  We can help you rollover your money from an employer sponsored retirement plan(s).  We can set up an IRA for you, complete all rollover paperwork, and help you choose the right investments in your IRA to accomplish your goals.

Special Note To Teachers and Employees of Non-Profit Organizations:

If you are a teacher or work for a non-profit organization and have money in a Tax Sheltered Annuity (TSA) or 403(b) plan, you may want to do a tax-free rollover of this money into an IRA.  In an IRA, you may have many more investment options since TSA/403(b) plans have only limited investment options.  Another reason to rollover TSA/403(b) money into an IRA is a tax rule regarding distributions taken from a TSA/403(b) that was put into effect several years ago.  The rule requires the custodian/trustee of your TSA/403(b) plan to do a mandatory withholding of  20% of any distributions you take for income taxes.  In an IRA, there are no mandatory withholding requirements.  With an IRA, you can decide if you want any income taxes withheld from a distribution and at what percentage or whether you would rather wait until you prepare your income tax return for the year to take care of any income taxes due. 


¹The application of surrender charges could result in a loss of principal.  Investment return based on market increases may be capped in some investments.

2An alternative investments strategy is subject to a number of risks and is not suitable for all investors. Investing in alternative investments is only intended for experienced and sophisticated investors who are willing to bear the high economic risk associated with such an investment. Investors should carefully review and consider potential risks before investing. 

*It is not possible to invest directly into an index.  The Standard & Poor’s (S&P) 500 Index is comprised of 500 widely traded industrial, transportation, financial and public utility stocks and is used as a benchmark.