Share this Page URL

Chapter 19. Roll, Roll, Roll It Over > Some Picky Rules and Thoughts - Pg. 189

Roll, Roll, Roll It Over 189 Some Picky Rules and Thoughts Here's some of the fine print about rollovers, as well as some other things to think about: · Direct rollover as default distribution option--Currently, if you leave employment with a balance of less than $5,000 and don't specify what you want to do with your balance, your plan is allowed to cash you out--that is, write you a check and withhold the taxes. You can still roll over the money, but you'll be stuck with all the hassles of regular rollovers that we mentioned. Under the new law, if you leave employment with an account balance more than $1,000 but not more than $5,000 (not including money that you rolled in from another plan) and you don't say what you want to do with your money, your plan must automatically roll over any distribution to an IRA on your behalf. Your employer gets to choose the IRA provider and how your money gets invested in that IRA, subject to certain guidelines that will be issued by the government. This new ruling will not be effective until final administrative regulations are published by the Department of Labor, which, by law, must take place no later than June 7, 2004. If the government gets its act together, this could be effective in 2002. Warning! If you're thinking of rolling over a portion of your 401(k) and keeping the remaining balance where it is, you'd better think again. Most employers won't let you take a partial distribution of your money. It's all or nothing. · 60-day limit--As mentioned previously, if you don't execute a rollover within 60 days from date of payment, you may end up paying income taxes on your payment--and maybe an early with- drawal penalty, as well. · Roll over some/cash out the rest--If you don't want to roll over all your money, you can roll over whatever part you want. However, you'll pay income taxes and early payment penalty taxes if you decide to cash out the amount not rolled over. · After-tax contributions--Starting in 2002, a new law allows rollovers of after-tax contributions-- but some special rules apply. If you want to move this money to another employer's plan, you must use the direct rollover method (trustee-to-trustee transfer). And although the new law per- mits pre-tax contributions and investment earnings to roll to other types of plans, such as 403(b) and 457 plans, you may roll after-tax contributions only to another qualified plan (which generally means a 401[k] plan) or an IRA. Furthermore, your new employer or the IRA provider must be willing and able to accept after-tax money and to maintain separate accounting for it. Why? Because this money, unlike your pre-tax contributions and earnings, does not get taxed when you finally withdraw it. · Company stock--If you have company stock and your employer distributes shares instead of cash, you'll have a challenge rolling it over. Virtually no new 401(k) trustees will accept the stock as a rollover, and most financial institutions won't, either. However, some brokerage firms will take your rollover in shares. If you don't have a strong desire to own the shares, try to get your company to pay you cash, and then roll over the cash.