IRA Rollover

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Question: Rollover vs Distribution and Roth IRA?

My mother-in-law was laid off and went to a local bank to ask them about options for her 401K. Their recommendation was to take the distribution (take a tax hit and early withdrawl penalty) and then roll that money into a bank CD within a Roth IRA. I am no personal finance expert, but do handle our own personal finances. But I did not see any logic in this. My thought would be that a direct rollover to traditional IRA would make most sense, since she would avoid any tax impact and early withdrawl penalty. Is this just a greedy personal banker trying to make commission off of selling a bank CD? Or is there something I am missing that would make their recommendation be the best financial option for her?

Answer: I have addressed this with est over 1000 people in my years.

You are smarter than the person at the bank. I have been telling people for the last 13+ years that banks and insurance companies don’t know how to manage money. Now we ALL known this.

I don’t know what kind of dollar amount we are talking about, but in general liquidating a 401(k), especially when under 59 1/2, is a bad idea.

One would lose 10% off the top as a penalty for early withdraw, if under 59 1/2.

Then, the entire amount would be added to her annual income in the year when the distribution was taken out.

Also factor state income tax on the money too.

I have found that people end up losing 45-50% of their retirement money from cashing in a 401(k) prematurely.

How will she make up for the lost assets after taxes and penalities? Bank CDs? Not in a million years.

$ Amount?
The amount of money and her age MIGHT influence my answer. If we are talking a couple thousand dollars, not a major impact. If we are talking $10,000+ that is more of an impact on an early withdrawal.

Age:
If she is under maybe 25, and the dollar amount is low, then MAYBE a ROTH because she might make it up (not in CD’s) over 50 years. If she is 40+, prob the IRA Rollover is the way to go.

Take the 401(k) move to an IRA Rollover. I would not have the bank do it, they are clearly bad advisors.

Try moving it to a brokerage firm where she would have more options and hopefully someone who is more competent. One can buy CD’s from banks across the country in a brokerage firm too if that is what she wants. CD’s will soon be paying close to nothing due to the declining interest rate environment.

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