Rollover Strategies

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Donna St.Amant, MBA, Portfolio Manager.
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What happens to your 401k when you leave the company?

An individual can choose to leave it at the old employer, roll it into a new employer’s 401k plan or roll it into a Rollover IRA.  All of these are viable options, but the best alternative is to roll your 401k into a Rollover IRA.  

Range of Investment alternatives. IRAs provide more flexibility of investment choices. 401k plans typically offer only mutual funds whereas the IRA allows for the purchase of individual securities, actively managed funds or low cost index funds. The IRA also offers greater flexibility when managing and trading in the account.

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Consolidation. Rolling over funds allows you to consolidate multiple 401ks and/or IRAs into one retirement account. This allows for ease in managing the investments and a huge benefit at retirement age when coordinating complex required minimum distribution (RMD) rules when turning 70.  

Lower fees. Company plans charge a fee for administering 401k plans, and at times identical funds have a higher fee when offered through a corporate sponsored plan versus purchasing in an IRA.

Tax efficiency. A rollover IRA allows the investor to maintain the tax-deferred status of the assets.

The key element to a Rollover IRA is that funds move without a tax penalty if done properly. Direct rollovers are the preferred way to move the money. No taxes are due or withheld. When an individual chooses a direct rollover, the tax deferred status of the investments remains intact.

An indirect rollover means that funds are payable to the individual and the employer withholds 20% for taxes. The individual takes receipt of the funds and has sixty days to deposit those funds into an IRA and make up the 20% that was withheld. If not, this will be considered a taxable distribution.

In some cases, an individual may choose an indirect rollover to have use of the money for sixty days. If this is the case, it is important to pay close attention to the rules around this type of transfer and be cognizant of the tax ramifications. The IRS allows an indirect rollover only once per 12 month period. If an individual rolls out a 401k into two different financial institutions, this would be considered two rollovers by the IRS and one would become taxable. Another snag in this scenario is that now that this is considered a taxable withdrawal from the IRA, it will be deemed a regular contribution when the funds are rolled into the new IRA. It would likely exceed the IRA contribution limits, thus triggering an excess contribution tax.

Given these aspects, it makes the most sense to choose a direct rollover. These are considered trustee to trustee transfers and the funds are never in the hands of the individual. This is the cleanest way to go.

Net Unrealized Appreciation Rule

Individuals who hold company stock within a 401k are potentially eligible for a tax break under the Net Unrealized Appreciation (NUA) rule. There are specific rules that apply in order to qualify for the tax break, so it is wise to consult with a tax professional. In general, if you are rolling over your entire 401k and you hold highly appreciated company stock, you can realize a tax savings on the unrealized gain in the stock by using this strategy.  

The company stock is transferred in kind to a taxable account, and the remaining retirement assets are rolled into an IRA.  Ordinary income taxes are due on the company stock, however; under the NUA rule, the tax only applies to the amount equal to your cost basis in the stock.  Any unrealized gains on that stock are taxed at the more favorable capital gains rate, even if the stock is sold immediately. Those rates are about half the rates applicable to IRA withdrawals. When there is substantial appreciation in the company stock, this can amount to significant tax savings.  

Note:  Donna St.Amant, MBA, is a Portfolio Manager at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit.

CNBC has named Point View to its list of the top 100 fee-only wealth managers in America! See http://www.cnbc.com/2015/06/03/cnbc-charts-the-top-100-firms.html

Point View Wealth Management, Inc. works with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. We are independent and fee only.  How can we help you?  Contact David Dietze (ddietze@ptview.com), Claire Toth (ctoth@ptview.com), or Donna St.Amant (dstamant@ptview.com) or call (908) 598-1717 to learn how.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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