Entrust Learning Center > 2. Account Types > Should You do a Rollover or Transfer?

Should You do a Rollover or Transfer?

We get this question many times when speaking with new clients about setting up their accounts.

By: Jaime Raskulinecz

There is no generic answer to this question but there are some things to consider.

When moving funds from a previous employer’s 401(k) plan to an IRA, you have
two options:

1. You may ask that the funds be transferred directly to your new custodian; this would be a direct rollover.

Of course, you must already have a new account set up so they have the information to transfer the funds. If you choose a direct rollover, you do not ever have the funds and there is no taxable event triggered. However, it could take up to four weeks for your new custodian to get the funds. Most direct rollovers must be initiated with the current custodian.

2. You may also ask for a rollover distribution; this would mean the current custodian would write a check to you for the amount in the plan.

If you take a rollover distribution from your previous employer’s plan it allows you to gain access to the funds quicker but triggers some events. The custodian for that plan will report to the IRS that you have taken a distribution. You will have 60 days in which to deposit the entire amount to a new custodian. Otherwise, you will be taxed on the amount as ordinary income and if you are not eligible for a normal distribution, there will also be a 10% penalty.

The most important consideration, we think, is the mandatory withholding. When taking a distribution from a former employer’s plan, there will be a 20% withholding. This money is recouped when you file your tax return as long as the entire amount was deposited with a new custodian within 60 days. However, the real issue is that you will have to deposit the entire amount that was in the plan with the new custodian, including the amount withheld.

This means if your account value was $100,000, the withholding will be $20,000. If you don’t deposit the entire $100,000 within 60 days, you will be responsible for tax on any amounts not deposited. If you are not 59 1/2, you will also be responsible for a 10% penalty.

Most people would find it difficult to make up the difference in order to avoid the tax and penalty. Please keep this in mind when you are considering your options.

Jaime Raskulinecz, CPM is the CEO of Entrust Northeast, LLC, a NJ licensed Real Estate Broker and CEO and principal of Rainbow Property Management, LLC, AMO. The management company is a third party provider that is one of only 20 firms in New Jersey to be awarded the Accredited Management Organization designation by the Institute of Real Estate Management. Ms. Raskulinecz has been a successful real estate investor herself for more than 20 years. www.entrustnortheast.com

Keywords|Tags

Refine your search using these keywords