The Tax Effect of Rolling From a 401(k) to an IRA in New Jersey

by Jack Ori

As you approach retirement age, you must face the question of what to do with your retirement funds. You can keep them in your 401(k) until you retire or roll them over to an IRA. Rolling funds over to an IRA may save taxes in the short term, but in some cases you'll pay more taxes overall if you go this route.

Tax Deference

When you roll funds over from a 401(k) to an IRA, the funds continue to be tax-deferred. This means you don't pay any taxes on them until such time as you withdraw the funds. In addition, if you are under the age of 59 1/2, you won't pay a penalty tax if you roll the funds over, as you would if you withdrew the funds. As of the time of publication, the penalty tax is 10 percent of the total withdrawal.

Net Unappreciated Realization

New Jersey allows taxpayers to use a strategy called net unappreciated realization to lower their taxes on dividends from company stock. This strategy allows you to pay income tax each year on the average cost of the shares rather than the shares' market value. Since this strategy saves tax dollars, you may end up paying more taxes when you withdraw funds from your IRA than if you put the stock in a taxable account and paid income tax on it using net unappreciated realization each year.


Your beneficiary can take out periodic payments from your IRA every year throughout the rest of his life, while he may have to take 401(k) benefits as a lump sum. This can have serious tax consequences, as the 401(k) benefits your heir takes out are taxed as ordinary income, just as they would be if you took them out yourself. Conversely, leaving the funds in the 401(k) allows your heir to apply net unappreciated realization to them, and he doesn't have to pay taxes on investment interest that accrues after your death -- only the interest that accrues during your lifetime.


401(k) plans and IRAs both have their advantages. As you approach retirement, your 401(k) plan may charge fees that significantly cut into your retirement savings, and IRAs offer more stock options. However, if you have a large nest egg, you should consult a tax adviser before rolling over your 401(k) funds to make sure that you won't end up paying higher taxes when you withdraw money from the account.

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