When it comes time to rollover your employer 401(k), what are your best options? Most think the best solution is to rollover your plan to an IRA. Here are six options to evaluate before making a decision. These are available to plans with employees – not all options will apply to sole proprietor plans. Most options will not apply to SEP and SIMPLE plan participants.
1. Rollover to an IRA. There are a lot of benefits to this option. Rolling over to an IRA is a tax-free transaction when a direct rollover is used to move the funds. IRAs have more investment choices and are more flexible when it comes to distributions and financial planning. You generally get better service from your advisors than you will get from the 800 number for the plan.
What’s Ok and What’s NOT Ok with an IRA Rollover
The once-per-year IRA rollover rule sounds easy to understand. You may only do one IRA-to-IRA (or Roth IRA-to-Roth IRA rollover) per year (365 days). However, there are many ways it can go wrong. Consider the following two scenarios. One involves multiple distributions and the other involves multiple rollover deposits. One is ok and the other is not.
One Distribution and Multiple Rollover Deposits – That’s Ok!
If you take one distribution from your IRA, you may split the funds and roll them over to multiple IRAs. The rollovers could be done on different days and that would not be a problem. This works for purposes of the once-per-year rollover rule because only one distribution is received even though there is more than one rollover deposit.
Example: Sophie receives a $100,000 distribution from her IRA on June 15. On June 20, Sophie rolls over $75,000 to her IRA. On June 25, she decides to roll over the remaining $25,000 to another IRA. This is not a violation of the once-per year rollover rule because Sophie received only one distribution even though she did two rollovers on two different dates.
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