Unfortunately, one of the negative consequences concerning COVID-19, is a sharp increase in the number of unemployed people. The global pandemic has caused a great deal of uncertainty within the business community. This will lead to a large number of job losses, at least on a temporary basis. If you find yourself out of a job, one of the most important things you can do is to thoroughly examine all of the options concerning your 401(k). For many people, the balance inside their 401(k) represents a substantial portion of an individual’s retirement plan. Therefore, it becomes critically important to make the proper decisions in terms of how to handle your 401(k), particularly if you become unemployed.

One of the most common questions among 401(k) participants involves the transfer (i.e. rollover) of 401(k) assets. This is a particularly frequent question because the rollover rules have changed during the past few years. Another reason why this topic is so popular is because there seems to be some confusion within the investment community concerning rollovers, transfers and withdrawals. Very briefly, let’s review the specific rules in regard to rollovers and transfers. Please read the following example.

Jane was recently laid-off by her employer. Thankfully, Jane has a large 401(k) balance of $250,000. She also has a second 401(k) from a previous employer. The balance is $35,000. Upon speaking with her employer, Jane has determined that she will not be returning to work any time in the near future. Therefore, she has decided to transfer her large 401(k) balance into an IRA. Jane contacts the 401(k) custodian and asks the custodian to send her a check for the balance of the account ($250,000). The funds are sent directly to Jane in the form of a check. This is known as an indirect rollover. In order to avoid fees and penalties, Jane has 60 days to send the entire 401(k) balance to her new IRA custodian. She successfully deposits $250,000 into her new IRA within the 60-day window.

Jane is happy with her new IRA custodian. Therefore, a few months later, she decides to transfer the small 401(k) with a balance of $35,000. Within two weeks, Jane receives a check for $35,000. She subsequently mails a check payable to her new IRA custodian. Unfortunately, Jane has made a costly mistake. Why? Because the IRS allows only one indirect rollover per 365-day period. This new law went into effect on January 1, 2015. Jane’s entire balance of $35,000 becomes 100% taxable. Effectively, the account is no longer considered an IRA. Jane made a mistake because she was not familiar with the rollover rules. Most likely, she could have avoided this taxable event by speaking to a licensed investment professional. Licensed professionals are familiar with rollover and distribution rules. They help their clients determine the proper strategy for transferring retirement accounts.

In the example above, Jane chose to use an indirect rollover for transferring her 401(k). She also had the option of selecting a direct rollover. What is a direct rollover? It’s a transfer option which allows for the movement of retirement dollars. More specifically, a direct rollover is an electronic transfer of retirement accounts between two custodians. With a direct rollover, the owner of the retirement assets does not receive a check from the custodian. More importantly, there is no limit on the amount of direct rollovers that can be initiated in a 365-day period.

In regard to Jane, a direct rollover would have been a much better option. Why? Because she could have completely avoided the taxable event on her $35,000 401(k). Jane made the mistake of performing two indirect rollovers in less than 365 days. By speaking with a licensed investment professional, Jane would have learned the difference between a direct rollover and an indirect rollover. Jane and her advisor could have discussed the appropriate course of action concerning her two accounts. In addition, by rolling over your 401k to IRA will provide more investment options.

Do you have questions concerning your 401(k) rollover? If so, you may want to speak with Angelica Roxas. Angelica has been licensed as an investment professional for almost 20 years. She is a Financial Strategist and President of Strategic Asset Preservation, Inc. Angelica is also the Founder and President of South Bay Tax Solutions. She is an expert in helping clients make the best decisions concerning their 401(k) assets. Ask Angelica about her Market Loss Recovery Program, which is designed to help clients who are struggling with their 401(k) investments.    

If you would like to meet with Angelica at no cost or obligation, she will be happy to review your financial situation. Angelica’s phone number is (424) 247-1120 or email at angelica@strategicassetpreservation.com. Visit us at: www.strategicassetpreservation.com


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