Working through the Maze of a 401(k) Rollover

Working through the Maze of a 401(k) Rollover
By Paul L. Anderson, Investment Advisor

With so many retirement accounts that offer tax advantages, it can become fairly effortless to have assets strewn across multiple accounts, but increasingly cumbersome to manage them all. Whether you’ve changed jobs, received an inheritance or are simply trying to secure a financial future, your retirement portfolio can quickly be filled with complex accounts like 401(k)s, 403(b)(7)s, Roth IRAs and Qualified Retirement Plans. Consolidating these accounts will make it easier to manage your portfolio.

Having a more comprehensive strategy will allow you to be better prepared to address risks such as longevity and market volatility. But before moving forward with a more cohesive retirement plan, take a look a look at your current portfolio with an financial advisor to better understand the steps that will need to be taken and any implications that may surround your decision.

More people are changing jobs now than in the past, leaving a number of people with a struggling 401(k). These accounts are designed with the single purpose of asset growth for retirement. The investment options are often limited and offer minimal flexibility for your future goals. If you have an old 401(k), chances are it isn’t working for you in the most effective way. By rolling your 401(k) into an IRA, your money will continue to see tax-deferred growth. You have the ability to access your assets penalty-free once you reach age 59-1/2. An IRA will also provide the opportunity for greater diversification, which leads to the implementation of a more tailored strategy to achieve your specific goals and risk management.

It is common to have accumulated company stock within an old 401(k). This often becomes a tax concern for some if the stock has gained appreciation. However, Net Unrealized Appreciation (NUA) rules may make it possible to considerably reduce the taxes owed on the gains. These rules can be complex and, as with any rollover decision, it’s best to contact a financial advisor to make sure any mistakes are avoided.

Inherited IRAs are other accounts that can frequently be left adrift. If you have an Inherited IRA, it’s important to make sure that it has become a solid part of your portfolio and managed strategy. If you are in the process of inheriting an IRA, be aware that there are very specific rules surrounding the event, depending on whether the beneficiary is a spouse, child or Trust. There are a few different rollover options available, so it’s essential to discuss your situation with a financial advisor before making a decision.

When consolidating your accounts, it’s not uncommon to see an indirect rollover. Mistakes often occur when indirect rollovers are processed and investors can be left owing taxes and penalties. Assets that are removed from a retirement account have 60 days to be placed into a new retirement account before any taxes or penalties are incurred. You should consult an advisor before initiating an indirect rollover to make sure that it’s the best option for you.

Changes are expected over the next few years regarding retirement. Now more than ever, it’s critical that you have a retirement plan that will offer maximum flexibility and a personalized strategy to help you reach your goals. It is important to have a plan that can address the risks of spending, longevity and market volatility. The most effective way to achieve this is by consolidating your accounts. Contact a financial advisor to begin simplifying your retirement.

Paul L. Anderson is an investment advisor and an owner of Moneywise Wealth Management. He is also a host of the Moneywise Guys radio program on KERN 1180 weekdays 10 a.m. to noon PST. His website is www.MoneywiseGuys.com.
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