Over the years I have worked with hundreds of people guiding them through the rollover maze. I have worked with
employees who have worked in small businesses, regional companies, national organizations as well as international
corporations. When an employee leaves their place of employment due to retirement, a career change, job relocation or
corporate "downsizing", an employee is faced with many issues. Some of these issues that need to be addressed are
what to do with accumulated funds in a 401k plan or vested pension benefits.
What is the difference between a 401k Plan and a Pension Plan?
A 401k Plan is an employer sponsored plan where the employee makes pre-tax contributions through payroll. The
employer may match some or all of the employee contributions. These contributions grow on a tax deferred basis. Any
funds withdrawn are subject to federal and state income taxation and if withdrawn prior to age 59 1/2 there is an additional
10% federal tax penalty. Some plans allow for loan provisions for active employees where taxation would not apply as
long as the loan is paid back in full.
A Pension Plan is an employer sponsored plan as well, but contributions are usually made only by the employer. There
are many types of pension plans that have many different features associated with them. Each pension plan document
needs to be reviewed to determine if an employee is eligible to participate, what is the vesting schedule, (how long do
they need to work to be entitled to partial or complete benefits) and contribution formulas to name a few. Some plans
allow for a lump sum to be paid to the employee upon termination and other plans provide a monthly payment.
Establish a Rollover Individual Retirement Account (Rollover IRA)
A terminated employee can establish a Rollover IRA and transfer the 401k balance and/or lump sum pension distribution
into the Rollover IRA account. No income tax is paid on the portion rolled over.
Seek Professional Advice
There are many Government rules and regulations that apply to rollovers which need to be addressed to protect funds
from otherwise avoidable taxation and penalties. Company sponsored Plans can have many different distribution options
based on the Plan documents. The terminated employee also has to make investment decisions regarding the funds that
have been rolled over. All of these factors need to be considered. Therefore, what your friend, neighbor or co-worker may
have done with their rollover, may not necessarily apply to you. I have seen many costly, avoidable mistakes made by
people who did not seek professional advice in these areas. This area is where I have extensive experience both as a
Financial Advisor and Certified Public Accountant. Seeking professional advice for assistance with this complex issue is