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David Lerner Associates: Seven Myths About Rollovers Debunked

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Monday, July 1, 2013

David Lerner Associates Branch Manager Michael Cody says that the first two options may not be ideal for many people. “When the money is left behind, a former employee might not pay attention to, or possibly neglect their assets in the old plan. And if it’s cashed out, taxes and penalties could consume up to half of the account’s value.”

Therefore, a rollover may be the best option for many people. Unfortunately, though, there are some myths and misconceptions when it comes to the details of how rollovers work. Below, Cody identifies 7 rollover myths:

1. If you leave your old job involuntarily (i.e., you were fired or laid off), you have to cash out your 401(k) plan when you leave. Or, you have to leave the money behind in your old plan.You are allowed to rollover the money in your former employer’s retirement plan regardless of the reason for your termination — whether you were fired, laid off or quit. As noted above, there may be negative consequences to cashing out your plan. Your former employer cannot force you to cash out or leave the money behind.

2. Money in a 401(k) must be rolled over into another 401(k). This is not true. For example, 401(k) money can also be rolled over into an IRA or, if your employer offers it, into a 403(b), 457 or Federal Thrift Savings Plan.

3. Money can only be rolled over into an existing Rollover IRA that’s already funded.Actually, the opposite is true: A Rollover IRA is created specifically to hold money that is being rolled over from a former employer’s retirement plan — no prior balance is required.

4. Annual IRA contribution and income limits will restrict your ability to rollover money into an IRA.While there are income and annual contribution limits associated with making contributions to IRAs, these don’t affect IRA rollovers. Nor does an IRA rollover affect whether or not you can make additional IRA contributions in the same year, or how much you can contribute in that year.

5. Only money in traditional 401(k) plans can be rolled over.Contributions to traditional 401(k) plans are made pre-tax, while contributions to Roth 401(k) plans are made post-tax. Both can be rolled over into a Rollover IRA. Traditional contributions and the earnings that originate from them will be classified as traditional after the rollover. Similarly, any Roth contributions and earnings originating from Roth contributions will remain classified as Roth even after a rollover.

6. Contributions made by your former employer into your retirement account cannot be rolled over.This depends on whether or not employer contributions are fully vested or not. Any contributions that are vested are yours to keep and rollover into an IRA, but any that aren’t will be returned to your former employer.

7. You must roll money over into the same funds in your new employer’s 401(k) or your IRA.When funds are rolled over, shares in existing funds are sold and the money is transferred into your new rollover account. You can then purchase shares in whatever funds are available in your new 401(k) or IRA, with no obligation to buy the same funds you owned in your old account.

Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC.

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Founded in 1976, David Lerner Associates is a privately-held broker/dealer with headquarters in Syosset, New York and branch offices in Westport, CT; Boca Raton, FL; Lawrenceville, NJ; and White Plains, NY. For more information contact David Lerner Associates Call 800-367-3000 Visit our website: www.davidlerner.com

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