What to do with rollover funds

Claire Damgaard, of Dubuque, is a financial services professional with New York Life. She also is writing articles for HER magazine. PHOTO CREDIT: JESSICA REILLY

At some point, people with retirement or employer-sponsored investment accounts will be faced with the decision of what to do with rollover funds. This can happen when you change jobs or when you retire.

In any case, it’s important to think through your options. Ideally, it’s best to choose a strategy that meets your retirement needs, minimizes the impact of taxes and avoids penalties.

Please note that this is a general overview, and tax laws can be tricky, so be sure to talk to an accountant and/or tax attorney before making your final decision.

Roll it over

One possible option is to directly roll your entire distribution into an individual retirement account or the employer-sponsored 401(k) at your new job. Either option will allow you to continue to defer taxes and enable you to continue building your retirement savings for the future.

Leave it where it is

You might want to keep funds in your employer’s plan, if that’s an option. This might be ideal if you want to take advantage of certain investment options or managed money services available in your existing plan. Your funds will remain tax-deferred and can later be moved, if you wish, to a new employer’s qualified plan or an IRA.

Take the taxable distribution

Depending on your situation, you might choose to withdraw the funds from your 401(k). Although this will give you immediate access to your savings, there are a few things to consider before taking a lump-sum distribution.

First, your money will no longer have the potential to grow tax deferred.

Second, it will be subject to ordinary state and federal income taxes.

Third, if you are younger than 59½, a 10% IRS penalty might apply.

Note that rollovers must be completed no later than the 60th day after the day you receive the distribution. To avoid any possibility of missing the deadline, have the money moved electronically from one account to the other. (This is known as a direct rollover.)

Claire Damgaard is an agent for New York Life Insurance Co. in Dubuque. To learn more, contact her at 563-581-5702 or cdamgaard@ft.newyorklife.com.

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