six potential 401(k) rollover pitfalls -...
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Oppenheimer & Co. Inc.Cynthia L. Keith, CFAExecutive Director - Investments2000 K Street, NW #800Washington, DC [email protected]://fa.opco.com/cynthia.keith
May 2016Six Potential 401(k) Rollover Pitfalls
What's New in the World of HigherEducation?
Cost of Living: Where You Live Can AffectHow Rich You Feel
How long should I keep financial records?
Six Potential 401(k) Rollover Pitfalls
See disclaimer on final page
You're about to receive adistribution from your 401(k) plan,and you're considering a rolloverto a traditional IRA. While thesetransactions are normallystraightforward and trouble free,
there are some pitfalls you'll want to avoid.
1. Consider the pros and cons of a rollover.The first mistake some people make is failing toconsider the pros and cons of a rollover to anIRA in the first place. You can leave yourmoney in the 401(k) plan if your balance is over$5,000. And if you're changing jobs, you mayalso be able to roll your distribution over to yournew employer's 401(k) plan.
• Though IRAs typically offer significantly moreinvestment opportunities and withdrawalflexibility, your 401(k) plan may offerinvestments that can't be replicated in an IRA(or can't be replicated at an equivalent cost).
• 401(k) plans offer virtually unlimitedprotection from your creditors under federallaw (assuming the plan is covered by ERISA;solo 401(k)s are not), whereas federal lawprotects your IRAs from creditors only if youdeclare bankruptcy. Any IRA creditorprotection outside of bankruptcy depends onyour particular state's law.
• 401(k) plans may allow employee loans.• And most 401(k) plans don't provide an
annuity payout option, while some IRAs do.
2. Not every distribution can be rolled overto an IRA. For example, required minimumdistributions can't be rolled over. Neither canhardship withdrawals or certain periodicpayments. Do so and you may have an excesscontribution to deal with.
3. Use direct rollovers and avoid 60-dayrollovers. While it may be tempting to giveyourself a free 60-day loan, it's generally amistake to use 60-day rollovers rather thandirect (trustee to trustee) rollovers. If the plansends the money to you, it's required towithhold 20% of the taxable amount. If you laterwant to roll the entire amount of the originaldistribution over to an IRA, you'll need to useother sources to make up the 20% the planwithheld. In addition, there's no need to taunt
the rollover gods by risking inadvertent violationof the 60-day limit.
4. Remember the 10% penalty tax. Taxabledistributions you receive from a 401(k) planbefore age 59½ are normally subject to a 10%early distribution penalty, but a special rule letsyou avoid the tax if you receive your distributionas a result of leaving your job during or after theyear you turn age 55 (age 50 for qualified publicsafety employees). But this special rule doesn'tcarry over to IRAs. If you roll your distributionover to an IRA, you'll need to wait until age 59½before you can withdraw those dollars from theIRA without the 10% penalty (unless anotherexception applies). So if you think you mayneed to use the funds before age 59½, arollover to an IRA could be a costly mistake.
5. Learn about net unrealized appreciation(NUA). If your 401(k) plan distribution includesemployer stock that's appreciated over theyears, rolling that stock over into an IRA couldbe a serious mistake. Normally, distributionsfrom 401(k) plans are subject to ordinaryincome taxes. But a special rule applies whenyou receive a distribution of employer stockfrom your plan: You pay ordinary income taxonly on the cost of the stock at the time it waspurchased for you by the plan. Any appreciationin the stock generally receives more favorablelong-term capital gains treatment, regardless ofhow long you've owned the stock. (Anyadditional appreciation after the stock isdistributed to you is either long-term orshort-term capital gains, depending on yourholding period.) These special NUA rules don'tapply if you roll the stock over to an IRA.
6. And if you're rolling over Roth 401(k)dollars to a Roth IRA... If your Roth 401(k)distribution isn't qualified (tax-free) because youhaven't yet satisfied the five-year holdingperiod, be aware that when you roll thosedollars into your Roth IRA, they'll now besubject to the Roth IRA's five-year holdingperiod, no matter how long those dollars werein the 401(k) plan. So, for example, if youestablish your first Roth IRA to accept yourrollover, you'll have to wait five more years untilyour distribution from the Roth IRA will bequalified and tax-free.
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What's New in the World of Higher Education?If you're a parent or grandparent of a collegestudent or soon-to-be college student, youmight be interested to learn what's new in theworld of higher education.
Higher college costsTotal average costs for the 2015/2016 schoolyear increased about 3% from the previousyear: $24,061 for public colleges (in-state),$38,855 for public colleges (out-of-state), and$47,831 for private colleges.1
Total average costs include direct billed costsfor tuition, fees, room, and board; and indirectcosts for books, transportation, and personalexpenses. Together, these items are officiallyreferred to as the "total cost of attendance."Note that the cost figure for private collegescited by the College Board is an average; manyprivate colleges cost substantially more--over$60,000 per year.
Higher student debtSeven in 10 college seniors who graduated in2014 (the most recent year for which figuresare available) had student loan debt, and theaverage amount was $28,950 per borrower.2It's likely this amount will be higher for theclasses of 2015 and 2016.
Student loan debt is the only type of consumerdebt that has grown since the peak ofconsumer debt in 2008; balances have eclipsedboth auto loans and credit cards, makingstudent loan debt the largest category ofconsumer debt after mortgages. As ofSeptember 2015, total outstanding student loandebt was over $1.2 trillion.3
Reduced asset protection allowanceBehind the scenes, a stealth change in thefederal government's formula for determiningfinancial aid eligibility has been quietly (andnegatively) impacting families everywhere. Youmay not have heard of the asset protectionallowance before. But this figure, which allowsparents to shield a certain amount of theirnonretirement assets from the federal aidformula, has been steadily declining for years,resulting in higher expected family contributionsfor families. For the 2012/2013 year, the assetprotection allowance for a 47-year-old marriedparent was $43,400. Today, for the 2016/2017year, that same asset protection allowance is$18,300--a drop of $25,100. The result is a$1,415 decrease in a student's aid eligibility($25,100 x 5.64%, the federal contributionpercentage required from parent assets).
New FAFSA timelineBeginning with the 2017/2018 school year,families will be able to file the government's
financial aid application, the FAFSA, as early asOctober 1, 2016, rather than having to wait untilafter January 1, 2017. The intent behind thechange is to better align the financial aid andcollege admission timelines and to providefamilies with information about aid eligibilityearlier in the process.
One result of the earlier timeline is that your2015 federal income tax return will do doubleduty as a reference point for your child's federalaid eligibility--it will be the basis for the FAFSAfor both the 2016/2017 and 2017/2018 years.
School Year Tax ReturnRequired
FAFSA EarliestSubmission
2016/2017 2015 January 1, 2016
2017/2018 2015 October 1, 2016
2018/2019 2016 October 1, 2017
American Opportunity Tax Credit nowpermanentThe American Opportunity Tax Credit wasmade permanent by the Protecting Americansfrom Tax Hikes Act of 2015. It is a partiallyrefundable tax credit (meaning you may be ableto get some of the credit even if you don't oweany tax) worth up to $2,500 per year forqualified tuition and related expenses paidduring your child's first four years of college. Toqualify for the full credit, single filers must havea modified adjusted gross income (MAGI) of$80,000 or less, and joint filers must have aMAGI of $160,000 or less. A partial credit isavailable for single filers with a MAGI over$80,000 but less than $90,000, and for jointfilers with a MAGI over $160,000 but less than$180,000.
New REPAYE plan for federal loansThe pool of borrowers eligible for thegovernment's Pay As You Earn (PAYE) plan forstudent loans has been expanded as ofDecember 2015. The new plan, called REPAYE(Revised Pay As You Earn), is available to allborrowers with federal Direct Loans, regardlessof when the loans were obtained (the originalPAYE plan is available only to borrowers whotook out loans after 2007).
Under REPAYE, monthly student loanpayments are capped at 10% of a borrower'sdiscretionary income, with any remaining debtforgiven after 20 years of on-time payments forundergraduate loans and 25 years of on-timepayments for graduate loans. To learn moreabout REPAYE or income-driven repaymentoptions in general, visit the federal student aidwebsite at studentaid.gov.
Tools for students
The Department of Educationand the Consumer FinancialProtection Bureau havelaunched the "Know BeforeYou Owe" campaign, whichincludes a standard financialaid award letter for colleges touse so that students can betterunderstand the type andamount of aid they qualify forand more easily compare aidpackages from differentcolleges. In addition, to helpstudents search for and selectsuitable colleges, theDepartment has launched itsCollege Scorecard online toolat collegescorecard.ed.gov.
Sources1 College Board, Trends inCollege Pricing 20152 The Institute for CollegeAccess and Success, StudentDebt and the Class of 2014,October 20153 Federal Reserve Bank ofNew York, Quarterly Report onHousehold Debt and Credit,November 2015
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Cost of Living: Where You Live Can Affect How Rich You FeelDo you find yourself treading water financiallyeven with a relatively healthy householdincome? Even with your new higher-paying joband your spouse's promotion, do you still find itdifficult to get ahead, despite carefully countingyour pennies? Does your friend or relativehalfway across the country have a better qualityof life on less income? If so, the cost of livingmight be to blame.
The cost of living refers to the cost of variousitems necessary in everyday life. It includesthings like housing, transportation, food,utilities, health care, and taxes.
Single or family of six?Singles, couples, and families typically havemany of the same expenses--for example,everyone needs shelter, food, and clothing--butfamilies with children typically pay more in eachcategory and have the added expenses of childcare and college. The Economic Policy Institute(epi.org) has a family budget calculator that letsyou enter your household size (up to two adultsand four children) along with your Zip code tosee how much you would need to earn to havean "adequate but modest" standard of living inthat geographic area.
What areas have the highest cost of living? It'sno secret that the East and West Coasts havesome of the highest costs. According to theCouncil for Community and EconomicResearch, the 10 most expensive U.S. urbanareas to live in Q3 2015 were:
Rank Location
1 New York, New York
2 Honolulu, Hawaii
3 San Francisco, California
4 Brooklyn, New York
5 Orange County, California
6 Oakland, California
7 Metro Washington D.C./Virginia
8 San Diego, California
9 Hilo, Hawaii
10 Stamford, Connecticut
Factors that influence the cost of livingLet's look in more detail at some of the commonfactors that make up the cost of living.
Housing. When an area is described as having"a high cost of living," it usually means housingcosts. Looking to relocate to Silicon Valley fromthe Midwest? You better hope for a big raise;the mortgage you're paying now on your
modest three-bedroom home might get you awalk-in closet in this technology hub, whereprices last spring climbed to a record-high$905,000 in Santa Clara County, $1,194,500 inSan Mateo County, and $690,000 in AlamedaCounty. (Source: San Jose Mercury News,Silicon Valley Home Prices Hit Record Highs,Again, May 21, 2015)
Related to housing affordability is student loandebt. Student debt--both for young adults andthose in their 30s, 40s, and 50s who either tookout their own loans, or co-signed or borrowedon behalf of their children--is increasinglyaffecting housing choices and living situations.For some borrowers, monthly student loanpayments can approximate a second mortgage.
Transportation. Do you have access to reliablepublic transportation or do you need a car?Younger adults often favor public transportationand supplement with ride-sharing services likeUber, Lyft, and Zipcar. But for others, a car (ortwo or three), along with the cost of gas andmaintenance, is a necessity. How far is yourwork commute? Do you drive 100 miles roundtrip each day or do you telecommute? Havingto buy a new (or used) car every few years cansignificantly impact your bottom line.
Utilities. The cost of utilities can vary bylocation, weather, usage, and infrastructure.For example, residents of colder climates mightfind it more expensive to heat their homes inthe winter than residents of warmer climates docooling their homes in the summer.
Taxes. Your tax bite will vary by state. Sevenstates have no income tax--Alaska, Florida,Nevada, South Dakota, Texas, Washington,and Wyoming. In addition, property taxes andsales taxes can vary significantly by state andeven by county, and states have different rulesfor taxing Social Security and pension income.
Miscellaneous. If you have children, otherthings that can affect your bottom line are thecosts of child care, extracurricular activities,and tuition at your flagship state university.
To move or not to moveRemember The Clash song "Should I Stay orShould I Go?" Well, there's no question yourmoney will go further in some places than inothers. If you're thinking of moving to a newlocation, cost-of-living information can makeyour decision more grounded in financial reality.
There are several online cost-of-livingcalculators that let you compare your currentlocation to a new location. The U.S. StateDepartment has compiled a list of resources onits website at state.gov.
Americans on the move
Americans are picking up andmoving again as the recessionfades, personal financesimprove, and housing marketsrecover. Counties in Florida,Nevada, and Arizona hadlarger influxes of people, whilesome counties in Illinois,Virginia, New York, andCalifornia saw more peoplemoving out. (Source: The PewCharitable Trusts, AmericansAre on the Move--Again, June25, 2015, www.pewtrusts.org)
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Oppenheimer & Co. Inc.Cynthia L. Keith, CFAExecutive Director -Investments2000 K Street, NW #800Washington, DC [email protected]://fa.opco.com/cynthia.keith
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2016
The content herein should not beconstrued as an offer to sell or thesolicitation of an offer to buy anysecurity. The information enclosedherewith has been obtained fromoutside sources and is not theproduct of Oppenheimer & Co. Inc.("Oppenheimer") or its affiliates.Oppenheimer has not verified theinformation and does notguarantee its accuracy orcompleteness. Additionalinformation is available uponrequest. Oppenheimer, nor any ofits employees or affiliates, does notprovide legal or tax advice.However, your OppenheimerFinancial Advisor will work withclients, their attorneys and their taxprofessionals to help ensure all oftheir needs are met and properlyexecuted. Oppenheimer & Co. Inc.Transacts Business on all PrincipalExchanges and is a member ofSIPC.
What are some tips for organizing financial records?Organizing your financialrecords is a cyclical processrather than a one-time event.You'll need to set up a systemthat helps you organize
incoming documents and maintain existing filesso that you can easily find what you need. Hereare a few tips.
Create your system: Where you should keepyour records and documents depends on howquickly you want to be able to access them,how long you plan to keep them, and thenumber and type of records you have. A simpleset of labeled folders in a file cabinet may befine, but electronic storage is another option forcertain records if space is tight or if yougenerally choose to receive and view recordsonline. No matter which storage option(s) youchoose, try to keep your records in a centrallocation.
File away: If you receive financial statementsthrough the mail, set up a collection point suchas a folder or a basket. Open and read whatyou receive, and decide whether you can file itor discard it. If you receive statementselectronically, pay attention to any notificationsyou receive. Once you get in a routine, you may
find that keeping your records organized takesonly a few minutes each week.
Purge routinely: Keeping your financialrecords in order can be even more challengingthan organizing them in the first place. Let thephrase "out with the old, in with the new" beyour guide. For example, when you get thisyear's auto policy, discard last year's. Whenyou receive an annual investment statement,discard the monthly or quarterly statementsyou've been keeping. It's a good idea to do asweep of your files at least once a year to keepyour filing system on track (doing this at thesame time each year may be helpful).
Think safety: Don't just throw hard copies offinancial paperwork in the trash. To protectsensitive information, invest in a good qualityshredder and destroy any document thatcontains account numbers, Social Securitynumbers, or other personal information. Ifyou're storing your records online, make sureyour data is encrypted. Use strong passwords,and back up any records that you store on yourcomputer.
How long should I keep financial records?There's a fine line between keeping financial records for a reasonable period oftime and becoming a pack rat. A general rule of thumb is to keep financialrecords only as long as necessary. For example, you may want to keep ATMreceipts only temporarily, until you've reconciled them with your bank statement.But if a document provides legal support and/or is hard to replace, you'll want to
keep it for a longer period or even indefinitely. It's ultimately up to you to determine which recordsyou should keep on hand and for how long, but here's a suggested timetable for some commondocuments.
One year or less More than one year Indefinitely
Bank or credit unionstatements
Tax returns anddocumentation*
Birth, death, and marriagecertificates
Credit card statements Mortgage contracts anddocumentation
Adoption papers
Utility bills Property appraisals Citizenship papers
Annual insurance policies Annual retirement andinvestment statements
Military discharge papers
Paycheck stubs Receipts for major purchasesand home improvements
Social Security card
*The IRS requires taxpayers to keep records that support income, deductions, and credits shownon their income tax returns until the period of limitations for that return runs out--generally three toseven years, depending on the circumstances. Visit irs.gov or consult your tax professional forinformation related to your specific situation.
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