You’ve been very careful with your 401k plan. You thought you did everything right. But ask yourself three questions:
If your answer to all three questions is yes, there’s a chance you’ll make 401k Critical Mistake #10 in THE 10 CRITICAL 401k MISTAKES series.
How so? Read on!
Because of the potential for greater diversification and administrative flexibility with IRAs, it’s very common to roll over your 401k to an IRA after retirement or after your leave your company. 401k Critical Mistake #10 can happen when you roll over your 401k to an IRA too early and unnecessarily trigger the potential for a 10% IRS penalty on IRA withdrawals made before age 59 ½.
Let’s look at a case study to illustrate this mistake.
Many people rush to roll over their 401k to an IRA after they retire or leave their company. To avoid 401k Critical Mistake #10, it’s important to know that the 10% IRS penalty for early withdrawal from a 401k contains an important exception that an early withdrawal from an IRA does not contain.
This exception has a name. It’s called “The Rule of 55”. After you turn 55, the “Rule of 55” allows you to avoid paying the 10% IRS early withdrawal penalty on 401k withdrawals if you retire or leave your company.
If you plan to retire or leave your company after reaching age 55, and desire to roll over your 401k to an IRA, consider the following strategy:
The goal of this hybrid approach of leaving a portion of your funds in your 401k and rolling over the rest to an IRA is to enjoy the potential benefits of IRAs while decreasing the potential tax burden. You’ll still pay income taxes on 401k withdrawals but leaving funds in your 401k may allow these withdrawals before age 59 ½ to avoid the 10% IRS penalty.
Important Disclosure InformationApril 2023
The above material is hypothetical and does not involve an actual client. The information herein is general in nature and for educational purposes only. No portion of the content should be construed by a client or prospective client as a guarantee that he/she will experience the same or a certain level of results or satisfaction if CPC is engaged to provide investment advisory services. A copy of our current written disclosure Brochure discussing our advisory services and fees is available at capplanllc.com on the Disclosures tab.
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Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your account holdings correspond directly to any comparative indices or categories.
There are additional complexities and risks pertaining to the successful implementation of this strategy that are beyond the scope of this material. Additionally, there may be situations where it’s not in your best interest to implement strategies discussed. In the event of a conflict between this presentation and an individual’s plan document (i.e., 401k), the terms of the plan document will control. Content is current as of the publication date or date indicated, and may be superseded by subsequent market, legislative and economic conditions. Consult with you tax and legal advisors regarding any potential tax and related consequences before acting.
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