The Responsibility: Increasingly, Americans are responsible for their retirement savings. For the most part, gone are the days of the 30 year employment tenure and the corresponding pension plan. Individuals are on the hook for saving, investing, and managing their retirement savings during their working years, and into their retirement. While saving and investing in a workplace retirement plan, such as a 401(k), is an extremely important topic, let’s limit our focus here to what to do with your account during a transition-either into retirement or to another employer. Specifically, should I rollover my 401(k) into an IRA (individual retirement account)?
The Options: Before you can answer this question, first review the options available to you, and the corresponding pros and cons. Generally when you are ready to retire, the options for your 401(k) are as follows (your plan provider must give you the specific options for your plan):
– Roll the money into an IRA and hire a professional advisor or self-direct your investments
– Roll the money into a new employer’s plan (If you are changing jobs)
– Take a lump sum (Seldom recommended and generally you must pay 100% of the taxes due)
– Leave the money in the plan
Of these choices (if available), when retiring or changing jobs the decision often comes down to either rolling over to an IRA vs. leaving the money in the plan/ rolling to a new employer’s plan. Because this is the most common decision individuals face, spelling out a few of the important pros and cons may help in the decision making process.
The Pros and Cons:
Pros: Do Rollover Because…
Cons: Don’t Rollover Because…
|Investment Flexibility: The number of investment choices available to you through an IRA will most likely be greater than in your workplace retirement plan||Creditor Protection: Retirement plans such as 401(k) plans offer tremendous creditor protection. This protection is almost always greater than the $1 Million limit on protection in an IRA account.|
|Professional Management: If you work with a financial advisor, they can manage the IRA’s investments and coordinate your distributions. An advisor also helps to review income tax implications of the account, and can make sure that your investments are in alignment with your financial goals.||Costs: Depending on the arrangement, it may be more cost effective to leave your assets in a retirement plan. Often there are low management fees, and often there are no transaction costs. Carefully compare the total costs of your employer’s plan with the costs of professional management.|
|Costs: Costs to manage a retirement plan are often ‘trickled’ down to the plan participants. These plan costs will not be passed to you in an IRA (although other costs may apply)||Loans: Many 401(k) retirement plans offer the ability to take ‘loans’ from the balance of your account. While there are pros and cons to this actual decision, the option to borrow from yourself is not available in an IRA|
|Roth Conversions: Once you have rolled your retirement plan into an IRA a Roth Conversion will be much easier to complete.||Your Plan’s Distribution Rules: Some retirement plans may have specific rules related to rollover IRA distributions that may be restrictive and/or have additional costs|
|Inherited IRAs: IRAs and 401(k) retirement plans are passed on by beneficiary designations. However, a beneficiary of an IRA can establish an inherited IRA easily, while a 401(k) beneficiary may be restricted by plan rules.||Working past 70 ½: If you plan on working past age 70 ½ you may have the option to defer taking your Required Minimum Distributions (RMD)|
|Required Minimum Distributions: When you reach 70 ½ you must begin taking minimum distributions in either a 401(k) or an IRA. Having a professionally managed IRA will allow you to carefully plan for and meet the RMD requirements each year.||You Own Company stock in your 401(k): If you own company stock in your 401(k) you will want to carefully consider the option to rollover as special tax considerations apply called Net Unrealized Appreciation.|
One Final Note: Trustee to Trustee Transfer vs. Rollover Check. If you do decide to rollover your workplace retirement plan into an IRA, a trustee to trustee rollover is often recommended because the assets simply move from one custodian to another. If you personally receive a check for the rollover amount, your employer is usually required to withhold 20% of the total amount, and then you have only 60 days to deposit it into a new account + the 20% withheld, or it may be considered a distribution. In addition you are only allowed to complete one such 60-day rollover per twelve month period.
Woodstone Financial, LLC is a fee-only financial planning and investment management firm located in Asheville, North Carolina. Contact us to learn more about our services.