“The journey is inevitable. Baggage-optional.” – Tev Aliage
Many people who look to retire may have retirement plan assets at their previous employer. These could be a 401k, 457 plan, 403b or similar plan.
There are many options to consider, and which is best for you?
In true Finger Financial Five fashion, let me share with you a story…
I am not a very good packer of clothes when I go out of town. Most of the time, I pack way too many clothes. However, there was one time recently I was rushing at the last minute and did not pack any socks. Needless to say, that isn’t good.
Packing for the trip and taking only what is needed takes some time and thought process.
This is similar to what to do with your company retirement plan assets. What to pack? And where to put it?
At Riverbend, we really don’t want you thinking of what to pack. We want you to focus on enjoying the trip. But the following are some of the things we think about when we are “packing” for your retirement.
First, you could leave assets in the current plan.
The pros for leaving in a current plan could be:
- If you leave work after age 55, you can take money from your company sponsored plan, 401k for example, without the normal 10% penalty that applies to withdrawals under 59.5. For some state, federal, or local safety workers the age is 50 or later.
- There may be more creditor protection in your employer plan.
- Could be lower cost, but fees vary greatly.
The cons for leaving assets in current plan:
- If you have an IRA, you could have many more investment options that may be more suitable for you and your situation.
- Could get better service.
- Your Eligible Designed Beneficiaries may not be allowed to stretch distributions. In short, plan rules vary which can limit beneficiary options.
- Your plan could restrict distributions. For example, limit withdrawals only quarterly.
- Mandatory 20% federal tax withholding on distributions, which may be too much. In an IRA you can choose which withholding is best for your situation.
- You could reduce cost. Just depends.
- Estate planning could be more difficult with company plan assets. Plans may not be as flexible as IRAs and company retirement plans can change their rules at any time.
Second option is to roll your money into a new company retirement plan.
Pros of rolling into new plan could be:
- Lower cost/better investment options. You would need to check on this.
- May be allowed to take loans. Please double check with your financial advisor or us at Riverbend Wealth Management to see if that is the best option for you.
The cons could be the same as leaving assets in the current plan.
A third option is rolling into an IRA. This could be an existing IRA or opening a new IRA.
The pros of rolling retirement assets into an IRA are:
- More investment options that may be more suitable for you and your situation.
- Consolidating accounts can simplify the retirement planning process by having investment management easier to track and having fewer places to make beneficiary forms up to date.
- Flexible taxable withholding options.
- Easier to manage Required Minimum Distributions. As you may recall, at age 72 you need to take a certain amount out of your pre tax retirement accounts. Failing to do so could be a 50% penalty. You can aggregate RMDs in IRAs, but you must take RMD from EACH 401k. That means you need to call each and every plan provider you have and request the proper dollar amount to avoid the 50% penalty.
There are estate planning benefits to IRAs which are:
- Consolidated accounts are easier for beneficiaries
- Splitting accounts to leave to separate beneficiaries is useful, when you have multiple beneficiaries with significant age differences, a beneficiary that is a charity, or a spouse that is 10 years younger than you.
- Naming a trust as a beneficiary, using customized beneficiary forms or allowing beneficiaries to take advantage of declaimer planning may not be allowed with your employee sponsored plan.
- Preserving the “stretch” option for Eligible Designated Beneficiaries.
I have seen people not update their beneficiary forms for old plans. They actually had the ex spouse as the beneficiary. Obviously, this would create a touchy situation if the person died without updating.
I have also seen people forget they have a plan. After working with us, one client found an old plan that had $64,000! That could have been more costly than forgetting to pack socks, huh?
Cons to IRA are same as pros on keeping in 401k with one added:
- If you are working, over 72 years of age, and own less than 5% of the company, you don’t have to take RMDs.
The Fourth option is Lump Sum Distribution. This is simply taking money out of the plan.
To do this there needs to be a triggering event like:
- Reaching age 59.5
- Separation from service-not for self-employed
- Disability-only for self-employed. The definition of disability is pretty restrictive in this case.
A REALLY BIG deal is when you have company stock at low cost inside your retirement plan. You can take advantage of Net Unrealized Appreciation. There are many things that can be done with this. PLEASE make sure you know all of your options here. Feel free to call us, is you would like a little help. Read more about NUA here.
Yes, this can be complex, but you don’t have to take all of this on by yourself. Feel free to call us if you have questions about anything. You can click here to set up a phone appointment or email us at Jeremy@Riverbendwm.com.
News from around the office, I just got back from a business trip in Dallas. I learned a lot about practice management to help Riverbend improve many of its processes. You may have or may be getting a call from me to help us understand what you value most and what you would like us to add or change. We are constantly striving to be better. Your input is greatly appreciated. We use this information to guide us to make changes that, in turn, help you live your best life. We hope to relay our findings during the survey calls to you in the coming months.
On the lighter side, Elliott finished his junior year in high school. He is now a senior?!?!? That just doesn’t seem possible. Yesterday he was a little kid running around the house and now he’s growing into a fine young adult. I really hope to enjoy as much time with him as I can until he goes off to college next year. He is looking at going to the University of South Carolina to study business and finance.
Hope all is well with you and your family,
Finger Financial Five – 5 points in 5 minutes or less – is to provide you with a weekly shot of useful financial information. My intention is to share principles, so that you will have more clarity and peace, that help you make better financial decisions.
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor; DBA Riverbend Wealth Management.
This content is developed from sources believed to be providing accurate information and provided by Riverbend Wealth Management. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.