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wvpa
May 29, 2014, 11:10 AM
I need state tax advise regarding a 401K with a former employer in NY state where I no longer reside. My question is will it benefit me do a rollover in an account in NY rather than rolling over to my new employer's plan in MD. Where will I be subject to State tax in my residing state of former?

ScottGem
May 29, 2014, 11:13 AM
If you do a rollover within the 60 days, then there will be no tax liability to worry about.

I don't see any advantage to a rollover in one state or another.

ebaines
May 29, 2014, 11:38 AM
You have three options:

1. Leave the existing account where it is, as part of your former employer's 401(k). It doesn't matter that your employer is in NY and you are in a different state - they'll be happy to maintain it as long as you want (assuming the comany's 401(k) plan's rules allow former employees to maintain such accounts). If you leave it alone there, when you retire and take distributions they will be subject to federal and MD taxes, not NY taxes. So really there is no rush to do anything right away.

2. Roll your 401(k) account to your new employer's 401(k) plan. Many (not all) 401(k) plans allow new employees to do this. The advantage is that it reduces paperwork somewhat, as you end up with only one 401(k) account to watch over instead of two. If you decide to do this talk to the plan administrator of the 401(k) at your new employer to find out what paperwork to submit - it should be a direct rollover from the old account to the new (more on that below).

3. Roll your old 401(k) into an IRA account of your choosing. The advantage of this approach is that there is a very wide range of options available for IRA investments, and typically the administrative fees can be much less than for most 401(k)s. You can easily set up a rollover IRA at an investment house such as Vanguard, Fidelity, Schwab, E-Trade etc., and they can handle all the paperwork to roll the account from your old firm into the new IRA.

The determination of which option to follow should be based on the choices of investments offered, and their cost. Whenever you invest in mutual funds there are fees sucked out - it's almost invisible but you can find the expense ratios in the mutual fund information, listed as 12(b) expenses. Many funds charge 1.25% and higher per year, whereas an index fund may charge only about 0.1%. That's a huge difference, and over a 40-year career can have a big effect on the size of your retirement nest egg. For retirement accounts I am partial to investing mostly in low cost index funds, but unfortunately many 401(k)'s don't offer that choice. As you can proably tell, when I changed jobs I went for option 3.

In any event I strongly advise that you make sure any rollover to a new 401(k) or IRA be done as a direct rollover, as opposed to you liquidating the old account, getting a check, and using that to fund the new account. One of the major downfalls of you doing it yourself is any distribution from the old account will automatically have 20% withheld for federal taxes, and even though there are no federal taxes due if you perform the tollover within 60 days, you must come up with that missing 20% on your own to put into the new account - otherwise the IRS will say you didn't do a full rollover, and it becomes taxable. It's not pleasant having to pay taxes on money you actually never received! So again - direct rollover is the way to go.