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New Federal Rules for Rollover 401k

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Friday, September 3, 2021

Having a retirement savings account is something that everyone should have, no matter how old you are. If you are one of the many Americans with corporate 401k accounts, then there's a chance you've accumulated quite a nice, healthy nest egg for yourself. This would be especially true if you took advantage of company-matching contributions over the years. 

The 401k is one of the best available retirement savings options. However, only 32 percent of Americans are investing in one, according to the U.S. Census Bureau. That is concerning, given the number of employees who have access to one: 59 percent of employed Americans. 

At some point, we will all have a decision to make regarding our retirement savings. What do you do when you retire or otherwise end your professional relationship with that employer?

Do you keep the money in the company retirement plan (if that's an option) or roll it into an Individual Retirement Account to sustain your tax-sheltered status going for a while longer? There's no requirement to roll or transfer money from a workplace plan into an IRA when leaving a job, but it's often the best option so you can continue deferring taxes.

This applies to the entire workforce, young and old because not everyone will stay employed at the same company for the duration of their working days. 

Taking into consideration the importance of this decision, the U.S. Department of Labor has issued new rules that affect financial advisers and their clients. The regulations are complex but they focus on potential conflicts of interest and what obligations your adviser owes you to help make a wise and well-informed choice.

The department said the intent of the rules is to "promote investment advice that is in the best interest of retirement investors."

American households as of mid-2020 held $10.8 trillion in IRAs, representing 34 percent of all retirement assets, according to a recent report from the Investment Company Institute. However, only about 12 percent of households contribute new money to traditional or Roth IRAs, the report added, meaning rollovers and investment gains account for most of the increases in these accounts. 

So, it is fair to say that rollovers from company-sponsored retirement plans are the main source of IRA growth. 

The Department of Labor's new regulations seek to prevent advisors from receiving payments from third-party investment companies that create conflicts of interest when dispensing rollover guidance.

As of December, when the regulations are likely to go into effect, advisors handling IRA rollovers will have to assert in writing that they are indeed fiduciaries.

When advisers act as fiduciaries they must disclose conflicts of interest, offer prudent advice, charge reasonable fees, disclose why rolling money into an IRA is in your best interest and act with undivided loyalty (meaning an ad
Fees are another area of interest to the regulations. But whether or not you're working with an adviser on a rollover, it's essential to have a fundamental understanding of how to move funds from a 401(k) plan into an IRA.

One option is to simply transfer assets directly over without taking possession of any funds in the process. This is the least messy and doesn't involve any taxes for the move. 

Another way is to take possession of the funds and manually reinvest in the IRA. This rollover method must be done within 60 days though, otherwise, it triggers an ordinary tax and a 10 percent penalty if you're under age 59 and a half.

Another complexity in this way of doing it is that employers must reserve 20 percent of the potentially taxable amount that you received. To avoid taxes and a possible penalty, you would need to come up with that 20 percent from somewhere else within the 60-day window.

Rolling over your 401k isn't a difficult thing to do, but the new regulations aim to make sure they're done right and that advisors who handle them are looking out for the best interest of their clients. 

 

IMPORTANT DISCLOSURES

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.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable-- we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

David Lerner Associates does not provide tax or legal advice. The information presented here is not specific to any individual's personal circumstances. 

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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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