Jim'sMoneyBlog

Financial Opinion and Insights

When NOT To Rollover Your 401(k)

Jim Lorenzen, CFP®

Jim Lorenzen, CFP®

Every year people who retire or change jobs face decisions regarding their old retirement plan.  Unfortunately, making a simple mistake can cost thousands of dollars.

Sometimes it’s good to NOT rollover your qualified plan into an IRA. 

If you’re retiring between the ages of 55 and 59½ and distributions are required, you’re better off staying in your qualified plan since there is no penalty on withdrawals after age 55 and separation from service  (age 50 for qualified public safety employees). [i]   Once funds are rolled into an IRA, there is generally a penalty for withdrawals prior to age 59½. 

Often, people who have already completed their rollover are younger than age 59½ and need a distribution.   In those cases, they can use rule 72(t) to avoid penalties.  When they do this, it’s best to split the IRA into two pieces for maximum benefit.

Each IRA stands on its own.  This means that taking 72(t) distributions from one IRA has no effect on the others!  So, if one IRA produces more income than is needed when placed on 72(t) distributions, you could split the IRA into more than one account, and use one of the smaller accounts to make the withdrawals.  Later, if you need more income, you can begin equal distributions from another account, as well.[ii]

If you’d like to learn more about this question, you can request my free report, Six Best and Worst IRA Rollover Decisions.  Just use the ‘Request Info’ button on our website and let me know!

Jim


[i] IRS Publication 575

[ii] Once rule 72(t) is selected, distributions must be taken for at least five years on that schedule or until age 59-1/2, whichever is later.  Failure to complete the schedule will result in a 10% penalty on prior withdrawals.

The Independent Financial Group is a fee-only registered investment advisor and does not sell products earn commissions, or accept any third-party compensation or incentives of any description.  IFG also does not provide tax or legal advice.  The reader should seek competent counsel to address those issues. Opinions expressed in this piece are those of the author.