A. Whether you are transitioning to a new employer or retiring from the workforce, you'll want to avoid some very common and irreversible mistakes when choose one of the four options. Consider these six questions can help you make wise decisions.
‘When will I need income?’
If you leave a company at age 55 or older, you could can take penalty-free withdrawals from the company-sponsored 401(k) account.
However, if that 401(k) is rolled into an IRA, the penalty-free withdrawal age increases to 59.5. (One notable exception is public-service employee plans, such as those for firefighters, police officers or emergency medical personnel, which may allow penalty-free withdrawals as early as age 50.)
The Withdrawal Penalty Loopholes
The IRS approved several methods of calculating withdrawals from an IRA before age 59.5; these can sidestep the 10% penalty — but if you plan to take this route, use caution. Once a 72(t) payment plan is established, it locks you in for a minimum of five years or until age 59 1/2, whichever is longer. Your IRA cannot be modified or changed during the payment period (except in case of death); failure to follow every strict rule of this strategy results in some very ugly tax consequences.
A better option may be to leave some assets in your former employer's 401(k) plan, before completing a rollover, if income will be needed before age 59.5. For example, perhaps you have a million-dollar 401(k), and you plan to take withdrawals totaling $200,000 in the first three years of retirement. Keep $200,000 in the 401(k) and roll the remaining $800,000 into your IRA.
Because employer plans can vary, it is important to discuss your strategy with the company plan administrator to ensure you're complying with the rules of that specific 401(k).
Keep reading for part II of this series.