Nicholson Financial Services, Inc.David S. NicholsonFinancial Advisor89 Access RoadSte. CNorwood, MA 02062781-255-1101866-668-1101david@nicholsonfs.comwww.nicholsonfs.com

Changing Jobs? Know Your 401(k) Options

June 12, 2020

If you've lost your job, or are changing jobs, you maybe wondering what to do with your 401(k) planaccount. It's important to understand your options.

What will I be entitled to?If you leave your job (voluntarily or involuntarily), you'llbe entitled to a distribution of your vested balance.Your vested balance always includes your owncontributions (pre-tax, after-tax, and Roth) andtypically any investment earnings on those amounts.It also includes employer contributions (and earnings)that have satisfied your plan's vesting schedule.

In general, you must be 100% vested in youremployer's contributions after 3 years of service ("cliffvesting"), or you must vest gradually, 20% per yearuntil you're fully vested after 6 years ("gradedvesting"). Plans can have faster vesting schedules,and some even have 100% immediate vesting. You'llalso be 100% vested once you've reached your plan'snormal retirement age.

It's important for you to understand how yourparticular plan's vesting schedule works, becauseyou'll forfeit any employer contributions that haven'tvested by the time you leave your job. Your summaryplan description (SPD) will spell out how the vestingschedule for your particular plan works. If you don'thave one, ask your plan administrator for it. If you'reon the cusp of vesting, it may make sense to wait abit before leaving, if you have that luxury.

Don't spend itWhile this pool of dollars may look attractive, don'tspend it unless you absolutely need to. If you take adistribution you'll be taxed, at ordinary income taxrates, on the entire value of your account except forany after-tax or Roth 401(k) contributions you'vemade. And, if you're not yet age 55, an additional10% penalty may apply to the taxable portion of yourpayout. (Special rules may apply if you receive alump-sum distribution and you were born before1936, or if the lump-sum includes employer stock.)

If your vested balance is more than $5,000, you can

leave your money in your employer's plan at leastuntil you reach the plan's normal retirement age(typically age 65). But your employer must also allowyou to make a direct rollover to an IRA or to anotheremployer's 401(k) plan. As the name suggests, in adirect rollover the money passes directly from your401(k) plan account to the IRA or other plan. This ispreferable to a "60-day rollover," where you get thecheck and then roll the money over yourself, becauseyour employer has to withhold 20% of the taxableportion of a 60-day rollover. You can still roll over theentire amount of your distribution, but you'll need tocome up with the 20% that's been withheld until yourecapture that amount when you file your income taxreturn.

Should I roll over to my newemployer's 401(k) plan or to an IRA?Assuming both options are available to you, there'sno right or wrong answer to this question. There arestrong arguments to be made on both sides. Youneed to weigh all of the factors, and make a decisionbased on your own needs and priorities. It's best tohave a professional assist you with this, since thedecision you make may have significantconsequences — both now and in the future.

Reasons to consider rolling over to an IRA:

• You generally have more investment choices withan IRA than with an employer's 401(k) plan. Youtypically may freely move your money around tothe various investments offered by your IRAtrustee, and you may divide up your balanceamong as many of those investments as you want.By contrast, employer-sponsored plans generallyoffer a limited menu of investments (usually mutualfunds) from which to choose.

• You can freely allocate your IRA dollars amongdifferent IRA trustees/custodians. There's no limiton how many direct, trustee-to-trustee IRAtransfers you can do in a year. This gives youflexibility to change trustees often if you aredissatisfied with investment performance or

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Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2020

Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC. Nicholson Financial Services, Inc. is not a registeredbroker/dealer, and is independent of Raymond James Financial Services. Investment Advisory Services are offered through Raymond JamesFinancial Services Advisors, Inc.

This information, developed by an independent third party, has been obtained from sources considered to be reliable, but Raymond JamesFinancial Services, Inc. does not guarantee that the foregoing material is accurate or complete. This information is not a complete summary orstatement of all available data necessary for making an investment decision and does not constitute a recommendation. The informationcontained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. Thisinformation is not intended as a solicitation or an offer to buy or sell any security referred to herein. Investments mentioned may not be suitablefor all investors. The material is general in nature. Past performance may not be indicative of future results. Raymond James Financial Services,Inc. does not provide advice on tax, legal or mortgage issues. These matters should be discussed with the appropriate professional.

customer service. It can also allow you to haveIRA accounts with more than one institution foradded diversification. With an employer's plan,you can't move the funds to a different trusteeunless you leave your job and roll over thefunds.

• An IRA may give you more flexibility withdistributions. Your distribution options in a401(k) plan depend on the terms of thatparticular plan, and your options may be limited.However, with an IRA, the timing and amount ofdistributions is generally at your discretion (untilyou reach age 72 and must start taking requiredminimum distributions in the case of atraditional IRA).

• You can roll over (essentially "convert") your401(k) plan distribution to a Roth IRA. You'llgenerally have to pay taxes on the amount youroll over (minus any after-tax contributionsyou've made), but any qualified distributionsfrom the Roth IRA in the future will be tax free.

Reasons to consider rolling over to your newemployer's 401(k) plan (or stay in your currentplan):

• Many employer-sponsored plans have loanprovisions. If you roll over your retirement fundsto a new employer's plan that permits loans,you may be able to borrow up to 50% of theamount you roll over if you need the money.You can't borrow from an IRA — you can onlyaccess the money in an IRA by taking adistribution, which may be subject to income taxand penalties. (You can give yourself ashort-term loan from an IRA by taking adistribution, and then rolling the dollars back toan IRA within 60 days; however, this move ispermitted only once in any 12-month timeperiod.)

• Employer retirement plans generally providegreater creditor protection than IRAs. Most401(k) plans receive unlimited protection fromyour creditors under federal law. Your creditors(with certain exceptions) cannot attach yourplan funds to satisfy any of your debts andobligations, regardless of whether you'vedeclared bankruptcy. In contrast, any amountsyou roll over to a traditional or Roth IRA aregenerally protected under federal law only if youdeclare bankruptcy.

Any creditor protection your IRA may receive incases outside of bankruptcy will generally dependon the laws of your particular state. If you areconcerned about asset protection, be sure to seekthe assistance of a qualified professional.

• You may be able to postpone required minimumdistributions. For traditional IRAs, thesedistributions must begin by April 1 following theyear you reach age 72. However, if you work pastthat age and are still participating in youremployer's 401(k) plan, you can delay your firstdistribution from that plan until April 1 following theyear of your retirement. (You also must own nomore than 5% of the company.)1

• If your distribution includes Roth 401(k)contributions and earnings, you can roll thoseamounts over to either a Roth IRA or your newemployer's Roth 401(k) plan (if it acceptsrollovers). If you roll the funds over to a Roth IRA,the Roth IRA holding period will determine whenyou can begin receiving tax-free qualifieddistributions from the IRA. So if you're establishinga Roth IRA for the first time, your Roth 401(k)dollars will be subject to a brand new five-yearholding period. On the other hand, if you roll thedollars over to your new employer's Roth 401 (k)plan, your existing five-year holding period willcarry over to the new plan. This may enable you toreceive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover alwaysbe sure to (1) ask about possible surrender chargesthat may be imposed by your employer plan, or newsurrender charges that your IRA may impose, (2)compare investment fees and expenses charged byyour IRA (and investment funds) with those chargedby your employer plan (if any), and (3) understandany accumulated rights or guarantees that you maybe giving up by transferring funds out of youremployer plan.

What about outstanding plan loans?In general, if you have an outstanding plan loan, you'llneed to pay it back, or the outstanding balance will betaxed as if it had been distributed to you in cash. Ifyou can't pay the loan back before you leave, you'llstill have 60 days to roll over the amount that's beentreated as a distribution to your IRA. Of course, you'llneed to come up with the dollars from other sources.1 Due to the Coronavirus Aid, Relief, and Economic Security(CARES) Act, required minimum distributions (RMDs) arewaived in 2020.

In some cases, you haveno choice — you need touse the funds. If so, tryto minimize the taximpact. For example, ifyou have nontaxableafter-tax contributions inyour account, keep inmind that you can rollover just the taxableportion of yourdistribution and keep thenontaxable portion foryourself.

Due to the CoronavirusAid, Relief, andEconomic Security(CARES) Act, penalty-freewithdrawals of up to$100,000 will be allowedin 2020 for qualifiedindividuals affected byCOVID-19. Individuals willbe able to spread theassociated income overthree years for incometax purposes and willhave up to three years toreinvest withdrawnamounts.

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