Weekly Financial Tip from Steve Sexton: 401k and IRA Rollovers

This week Steve Sexton, the San Diego Entertainer’s trusted financial advisor, offers you tips and strategies that will help you hang on to your money in these tough economic times—specifically, by explaining the ins and outs of IRA and 401k rollovers.

With the economic atmosphere across the country over the last two years, many people have lost their jobs—and their 401ks are still sitting with their former employers. According to Steve, many people lost between 30 to 60 percent in their 401k in 2008, mainly due to the lack of investment options in that 401k, as well as the many fees that go along with having that plan.

If you were to roll your 401k into an IRA however, you would have many investment options—stocks, bonds, mutual funds, real estate investment trusts, annuities, etc. Also, doing so affords you the ability to know your expenses and control them—a benefit that allows your funds to grow more quickly and you to have a more comfortable retirement. Before going ahead with the rollover, however, Steve cautions, you must take one very important element into consideration: If you have company stock in your IRA or 401k, you need to have it evaluated prior to conversion to avoid making a huge tax mistake. If there is unrealized appreciation in your company stocks, you are eligible to take advantage of it, meaning you could save yourself thousands upon thousands of dollars in taxes.

Furthermore, Steve advises that a good rule of thumb before rolling over your IRA is to go through a thorough review process beforehand—which includes understanding what tax issues are associated with your IRA rollover or stretch, as well as the income impact of those strategies. Once you know the tax situation, you can go about illuminating ways to reduce or eliminate the taxes you would have to pay. In addition, understanding the income impact allows you to identify whether or not the strategy you choose to employ will allow your income to survive throughout your lifetime.

Lastly, Steve stresses that your personal risk comfort level is of extreme importance. If you are converting or rolling over your IRA, it is necessary that you do so with stable rather than volatile investments, so that you do not lose your converted money during a time of financial crisis, such as a recession.

The Entertainer & Lifestyles Magazine has partnered with a top local financial expert to provide ongoing financial advisories. As part of the Entertainer’s continued commitment to San Diego’s financial wellbeing, Steve Sexton will continue to contribute and provide financial advice to our readers. Learn more about Steve Sexton on the Entertainer or tune in next week for another tip.

Photo from stevendepolo via flickr