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RolloverSystems Lists 10 Tax Tips For Job-Changers

Tops On The List: Don't Cash Out That 401(k) Plan!

CHARLOTTE, N.C. (March 19, 2003) -- Workers who have left their jobs recently can take a number of steps to reduce their tax liability for 2002 and, looking ahead, for the 2003 tax year and beyond.

"Fourteen million workers will leave their jobs this year," said Reginald Bowser, president and CEO of RolloverSystems, the leading provider of technology-based 401(k) rollover products and services. "Whether they are going back to school to advance their career, taking a new job, or going into business for themselves, there are a number of strategies they can use to reduce their tax obligations and protect their retirement nest egg."

For job changers who have retirement savings invested through their employer's 401(k) plan, the most important decision is whether to keep their money in the former employer's plan, transfer the assets to a new employer's 401(k) plan, or roll over the savings into an Individual Retirement Account (IRA). Unfortunately, many workers choose none of these options and simply cash out their 401(k) account.

"From a tax standpoint, that's the worst choice a worker can make," Bowser said. "Instead of allowing your hard-earned savings to continue growing on a tax-deferred basis, cashing out a 401(k) subjects those funds to taxation now, in most cases at a higher rate than the worker would pay if he left the money in the account until retirement. Penalties for early withdrawal further erode savings."

Bowser offers the following 10 tax tips for job changers:

  1. Don't cash out your 401(k): Cashing out a $10,000 401(k) can cost up to $4,000 in taxes and early withdrawal penalties, but that's just the beginning, Bowser says. The lost potential for capital appreciation adds to the financial pain.
  2. Act fast to avoid taxes: If you took a cash distribution from your former employer's 401(k) plan within the past 60 days, you can still avoid the tax hit by rolling over to an Individual Retirement Account (IRA). Taxes withheld by the IRS upon distribution can be recouped by contributing the full amount - distribution plus withheld portion - to your new IRA.
  3. Roll it over online: If your 60-day rollover period is close to expiring, go to www.rollovermarket.com to roll over your 401(k) assets online. The site allows you to choose an IRA from among competing financial institutions and roll over your retirement plan assets in as little as 20-25 minutes.
  4. Keep track of job-hunting expenses: If you just left a job, chances are you're hunting for a new one. Job-hunting expenses incurred this year may be deductible on your 2003 taxes, so keep good records of any costs related to your search. See instructions for IRS Form 2106.
  5. Check eligibility for extra credits: If you roll over your 401(k) savings to an IRA, you may be eligible for the Retirement Savings Contributions Credit, depending on your income level. The credit is in addition to other tax benefits that may result from the retirement contributions.
  6. Tax credits for course credits: You're a job changer who has returned to school to improve your career outlook? Check into the Hope Scholarship Credit and the Lifetime Learning Credit, which offer tax credits - a dollar-for-dollar tax cut - of $1,500 and $1,000, respectively, for tuition and other education-related expenses.
  7. Deduct home office expenses: If you left your job to start a new business out of your home, you may be able to use the home-office deduction to reduce your net business profit and self-employment income. This one is tricky, so consult IRS Publication 587 to learn more.
  8. More help for self-employed: Tax rules allow you to deduct 70 percent of the cost of your health insurance from your total income. Health insurance costs that aren't covered by this deduction can be included with other medical expenses on Schedule A.
  9. Extend your filing deadline: The IRS allows for an automatic extension of the filing deadline to August 15, 2003. However, you're still on the hook to pay your tax by April 15 and will incur late filing penalties if you don't.
  10. Consult a tax professional: With all the changes in the tax laws, it's not a bad idea to get some professional advice just to make sure you're taking advantage of all deductions, credits and other tax-reducing strategies.

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