Financial Solutions

Financial Solutions

Financial Solutions

Financial Solutions

Nov 07, 2017

Your 401(k): Know Your Options

What you do with the money in your old retirement plan can significantly impact tomorrow’s income, so it is important that you are informed about the different options you have when you either retire or change jobs

Option 1:  Leave your money in your former employer’s plan
Potential benefits

  • No immediate action is necessary
  • Earnings remain tax-deferred until withdrawal
  • Keep money in plan-specific investment options
  • Investment alternatives may include lower-cost, institutional-class products
  • Loans and hardship withdrawals may be permitted
  • Penalty-free withdrawals permitted if separated from service after age 55
  • Potential increased protection from creditors under federal law
  • Plan may have lower administrative fees than other options

Issues to Consider

  • May have a limited number of investment options
  • Withdrawal options may be restricted
  • Cannot make additional contributions
  • Some plans may not provide access to plan-specific advice
  • Plans may have administrative fees (e.g., recordkeeping, compliance or trustee fees)
  • Plan may impose limitations (e.g., income distribution or spousal waivers) or plan may be changed by employer (e.g., available investments, fees, services, providers, termination provisions)
  • Managing assets across multiple plans or accounts may be difficult

 

Option 2:  Roll assets into a new employer’s 401(k) plan
Potential benefits

  • Earnings accrue tax-deferred
  • Plan may allow for a loan or hardship withdrawal
  • No income tax or penalties with a direct rollover
  • Penalty-free withdrawals permitted if separated from service after age 55
  • Potential increased protection from creditors and legal judgments
  • Plan may have lower administrative fees than other options
  • Investment alternatives may include lower-cost, institutional class products
  • Access to plan-specific advice

Issues to Consider

  • New employer’s plan may not accept rollovers
  • Withdrawal options may be restricted
  • Typically limited investment choices
  • May need to liquidate investments
  • Plans may have administrative fees (e.g., recordkeeping, compliance or trustee fees)
  • Plan may offer more expensive investment options, including commissions, than your former employer’s retirement plan
  • Plan may impose limitations (e.g., income distribution) or plan may be changed by employer (e.g., available investments, fees, services, providers, termination provisions)

 

Option 3:  Roll your assets into either a Traditional or Roth IRA
Potential benefits

  • Depending on the type of rollover, there may be no income tax or penalties
  • You can consolidate multiple accounts into one, providing a clearer picture of your retirement assets
  • Typically a broader range of investment options
  • Continued opportunity for tax-deferred or tax-free growth, depending on the type of IRA.
  • Continue to make contributions subject to IRS limits
  • Many IRA providers offer managed accounts, which can provide professional management tailored to your investment preferences
  • Ability to convert to a Roth IRA

Issues to Consider

  • Access to plan-specific investments may not be available
  • Cannot take a loan from an IRA
  • Some IRA investments may include trading-related expenses, including commissions and fees
  • May need to liquidate investments before rolling over to an IRA
  • No penalty-free withdrawals prior to age 59½ (exceptions are available)
  • Some investment expenses and account fees may be higher
  • IRA assets generally protected by bankruptcy (state laws vary)

 

Option 4:  Withdraw your money for a cash distribution
Potential benefits

  • Immediate access to your cash

Issues to Consider

  • Taxes and penalties for cash distributions can be hefty, and your savings will no longer grow tax-deferred, thus impacting whether you have enough money when you retire
  • Potential 10% early withdrawal penalty may apply if you are under age 59½
  • 60-day window to roll over before funds are taxed as ordinary income and could incur potential penalties

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