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Remember Dividends Before Rolling Over 401Ks

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If you roll over your 401K into a rollover IRA as I have just recently done, be aware of any dividends that might be coming your way. I held a few shares of stock in a self-directed account associated with my 401K and I believe I rolled over my account after the ex-dividend date but before the actual dividend payout date. Now, if you hold shares of stock on the ex-dividend date then you will get the dividend payout, usually a couple weeks later, deposited into your account. This presents a unique problem for folks rolling funds over because now you have, essentially, orphaned funds sitting in your 401K that is likely under the rollover threshold.

This is exactly what happened to me and I had a little more than a dollar orphaned in my self-directed investment account, far less than the $1,000 threshold. What this means is that in order to get the money, I’ll have to take a lump-sum withdrawal which will be subject to income taxes and a 10% penalty; which is exactly what I did.

Now, this isn’t such a big deal for me because of how little that amount is, but if you’re talking about a 401K that you’ve had for thirty years, this dollar amount could be pretty sizable if you have some of it individual stocks. How can you avoid this? Since you can rollover at anytime after you leave your job, simply double check that you aren’t between the ex-dividend and the dividend date.

Now I have to figure out what I can spend my 99 cents on!

{ 9 comments, please add your thoughts now! }

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9 Responses to “Remember Dividends Before Rolling Over 401Ks”

  1. Martin says:

    Any other good tips on rolling over a 401K? I just started a new job and have about $4000 in my last company’s 401K. I’m not quite sure if I want to roll into my new company’s 401K or just into a Traditional IRA. I guess I could roll into a Roth, but I don’t quite have the money to pay the taxes. The Traditional or Roth sounds good to me as I like to watch it, and I like the options I will get vs. my company’s limited 401K.

    Let me know what you think. Thanks.

  2. jim says:

    Are you happy with your former employer’s 401K options? if so, you don’t have to roll it over.

    What about your new job’s options? If you like those better, roll it into your new company’s 401K.

    If you like neither, consider rolling it over into a Traditional IRA somewhere but you should know that $4k is a small balance, by brokerage standards, and so you’ll probably have to pay an annual fee for having a low balance – which can eat into your earnings.

    Good luck!

  3. Tinyhands says:

    @Martin-
    You cannot roll your former 401k into a Roth IRA without paying penalties and taxes. This is because Roth IRAs are only for post-tax money. You did not pay taxes on the money in your 401k, so you would have to do that now. I believe that will cost you 10% PLUS your current tax rate. You can roll it into a Traditional IRA (also called a Rollover IRA), which is for pre-tax monies, without penalty or taxes. Putting the money into an IRA does not affect your 2006/2007 IRA contribution limits though.

    Your specific tax circumstances may mean that it makes sense to recharacterize that Traditional/Rollover IRA into a Roth (if you have a lot of unused deductions or a prior-year net operating loss which you previously elected to carry forward, as two examples) but that is something you should probably plan ahead of time.

    Otherwise Jim’s assessment of reasoning is correct. If your current 401k plan has decent choices, it’s probably better to put that little bit into the current plan. If you’re not wild about the choices, or if you think you can balance out the 401k with a more diversified election, then go with the IRA.

  4. Foobarista says:

    Why can’t you roll this new money into a rollover IRA? Sure, it may be tiny for now, but you can Roth-ize it later, or roll it into a traditional IRA into which your 401K will eventually go when you change jobs.

  5. jim says:

    Foobarista: If you were asking me why i couldn’t, it’s because $1.24 is under the threshold of $1,000.

  6. kurt says:

    I have this issue in my 401k when I sell a fund. If it paid a dividend, I invariably get left with $0.15 of the fund popping into my account when I’m not looking. Kind of weird, but the numbers are so small, I don’t really care.

  7. Foobarista says:

    OK – I missed the “little over a dollar” part – sorry :) But you could still do a rollover to an existing T-IRA, even with such a small amount.

    Anyway, I still wonder why you didn’t roll it into an IRA versus a 401K? I went ahead and discussed this on my blog…

  8. Tinyhands says:

    @Foobarista-
    Line 1: “401k into IRA, as I have just recently done”

    @Jim-
    I’m a little surprised that your plan administrator didn’t go ahead and transfer the dividend as well. I’ve had the same thing happen in taxable accounts and the brokerages just sent me the chump change 2 weeks later (or whenever). Maybe a phone call would have prevented that, as well as saving you the extra few minutes you’ll have to spend on your 1040.

  9. CHUBROCK says:

    Thanks for the tip. I am about to rollover an old 403(b) into an IRA and that fact never crossed my mind. Just goes to show you that you can’t depend on anyone else to look out for you and your money.


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