Job Changes and 401(k) Rollovers

Leaving your current job? You may want to roll over money in your employer's 401(k) plan into an Individual Retirement Account, where you might enjoy greater investment choice and lower investment costs.

But before you pull the trigger, keep a couple of wrinkles in mind. First, don't let your old employer cut you a check for your 401(k) balance. If that happens, you'll get a check for just 80% of the balance, with the other 20% withheld for taxes.

You can reclaim that 20% on your next tax return--but only if you roll over 100% of your old 401(k) balance to an IRA within 60 days of receiving the distribution from your old employer. To do that, you'll need to find the extra 20% elsewhere, so you can roll over the full 100%.

What if you can't find the extra cash? The money not rolled over will be considered a taxable distribution--and you'll owe income taxes and possibly a 10% tax penalty. To avoid this nasty dilemma, try to arrange a direct rollover (also called a trustee-to-trustee transfer) from your 401(k) to your new IRA.

Second, if you hold company stock in your 401(k), you may be able to pull the stock out of the 401(k) and, when you later sell those shares, pay taxes on any appreciation at the long-term capital-gains rate. That rate is lower than the income-tax rate usually paid on retirement-account distributions.

The "net unrealized appreciation" tax strategy for company stock isn't right for everybody. For instance, it triggers an immediate income-tax bill, possibly including the 10% tax penalty, on the stock's "cost basis." That tax bill may wipe out the strategy's other tax benefits. The rules involved can be complicated, so you'll likely want to talk to a tax advisor.

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