Smart Strategies for 401(k) Rollovers to IRAs

Here’s how to keep your nest egg intact when you change jobs.

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Leave employer stock behind. Company stock gets special tax treatment when it is held in the company 401(k). While the original cost of the stock will be taxed at ordinary income tax rates when you withdraw it, the appreciation of the shares is taxed at the often lower long-term capital gains rate when you sell it. However, you will lose out on the lower tax rate if you roll the stock over to an IRA.

Don't cash out. If you cash out a $50,000 balance in a 401(k) account and you are in the 25 percent tax bracket, you could face a $12,500 tax bill in a single year. And if you are under age 55, you could additionally have to pay a $5,000 early withdrawal penalty. However, if you successfully roll the balance to an IRA or new 401(k), you can avoid the early withdrawal penalty and continue to defer income taxes up until age 70½, when annual withdrawals become required.

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