One good reason to pause before you roll over your 401k is to check if you might benefit from a little known tax break that goes by the rather cryptic term “NUA”.   NUA stands for Net Unrealized Appreciation, which probably doesn’t help clarify things much either. 

Essentially, NUA is a strategy by which people who hold company stock in their 401k plans can end up paying less income tax when making a withdrawal from the plan.   Just as its name is a bit of a challenge to decipher, so is the rule itself.  I won’t reinvent that wheel, since there is an excellent discussion of it in this Wall Street Journal article.

Suffice it to say that not everyone benefits, and there are downsides (such as having to pay the tax sooner than you otherwise might), but for those in certain situations, the tax savings can be worth it.  Which situations are most favorable for NUA?

• You’re in a high tax bracket
• The stock is highly appreciated
• You own quite a bit of it
• You’re old enough to no longer be subject to a 10% penalty on withdrawals
• You need the money now (e.g. got laid off) and have to take at least some anyway

If you seem like a good candidate, be sure to check into it before you roll over your 401k.   And DON’T sell the stock!  Once it’s sold or the account is rolled over into an IRA, you’re out of luck when it comes to NUA. 

There are a few other gotchas that can invalidate the whole effort, so be extra careful, read the fine print (yes, I mean the IRS documents), do the math, and seriously consider working with a tax specialist or financial planner, if you decide to go this route.   In the end, if it doesn’t make sense for you, you can always just roll over…

Morsel rolls over

Well, all good things must come to an end, and so it is with Pink Slip Lemonade month, which has already borrowed a few days from July.   

To commemorate this last day, I thought I’d tackle the granddaddy of all, the most frequently asked post-pink slip question: whether or not to roll over your 401k. My answer is usually “Probably yes, probably to an IRA, but don’t feel like you have to be in big hurry to make it happen.”

The person who approached me with this question after last Thursday’s “Making the Most of Your Money: Post-Pink Slip and Beyond” presentation at the Network for Work meeting actually had old 401k’s from not 1, not 2, but 3 ex-employers.  And that illustrates one of several reasons I usually say “Probably.”  Frankly, this is just a lot to keep track of, plus a lot of extra paperwork, for what usually amounts to no additional benefit.  To make matters worse, it’s not uncommon for employers to change 401k plans or 401k administrators to get acquired, further complicating matters.  While it would seem unthinkable to forget about an account you worked so hard to build, when things get this unwieldy, it happens. 

Having this many accounts also makes it hard to tell if the investment mix of your overall portfolio(stocks vs. bonds vs. real estate, US vs. international, small vs. large, etc.) matches your target or not.  Since asset allocation is one of the key determinants in the portfolio’s performance, this is pretty important.

Tweety too

Speaking of investment choices, that’s another good reason to consider rolling your 401k over to an IRA, not your new employer’s 401k.  While things are improving all the time, many 401k’s still offer limited and/or costly investment choices.  Chances are that will be true of the new employer plan as well, hence my recommendation to go IRA… with a discount broker, if you want to contain costs. 

(Caveat!  IRA’s and 401k are NOT governed by exactly the same laws, so be sure you don’t need to take advantage of a feature allowed on the old 401k but not after the money is rolled over.  As an example, if you leave a job at age 55+, you can take withdrawals from your 401k penalty-free.  Not so for an IRA.  There are others, many to do with early withdrawal exceptions, so it pays to research these differences!)

To sum up then, yes, I usually recommend people roll over their 401k’s, but know that, unless the balance in your account is less than $5000, your employer can’t kick you out.  (Find details on this here.) So if you’ve got a lot on your plate — as an outcome of your job change or for any other reason — don’t feel any extra pressure to make this happen ASAP.  Just don’t let it fall so far down the To Do list that you forget you have it. 

Have a great 4th of July!

Another hot topic during the session was, not surprisingly, where to get cash to cover living expenses that, pre-pink slip, used to be covered by wages.  As discussed during the meeting, once you’ve looked in all the obvious places (severance, unemployment benefits, part-time work, emergency fund, etc.), things start to get a little tricky, what with the income taxes, penalties, exceptions, and many other factors that play in when tapping other sources.  This Wall Street Journal article, How to Tap Crisis Cash, does a good job analyzing and comparing the pros and cons of the various options.

(Note: If dealing with post-pink slip money management has you feeling like you could use a good stiff drink, take a look at the most recent Pink Slip Lemonade recipe supplied by Chef Patti Anastasia: Pink Slip Lemonade Mimosa.   She promises it will put a sparkle in your day!)