Leaving an Employer or Retiring
You have a decision to make regarding the 401K
If you are planning to, or have recently retired or left your job, then you have a very important decision to make regarding your 401k.
What are your options?
- You can leave your money in your current 401k plan. This is the easiest option, but not always the most efficient one. 401k plans do have several investment options, but you are stuck with the funds chosen by the company. This limited lineup of funds may be underperforming or have high costs and high fees. Regardless, you are limited to the pre-selected investment options this plan provides.
- You can roll over your money to an Individual Retirement Account or “IRA” of your choice, providing a much wider array of investments options which may be superior, higher performing, and/or with lower fees than those provided at a 401k plan. A wealth management advisor can help you navigate the selection of rolling into an IRA vs a Roth IRA.
- If you are joining another company and this company accepts rollovers from other plans, you can bring your 401k balances from your previous employer to the new employer. Even if this is allowed, you may encounter a similar drawback of limited and pre-selected list of investment options that may or may not have been what you would have chosen if you could.
- You can always cash out the plan upon leaving your company, but any early cash out of a retirement plan will incur substantial penalties. If you cash out before age 59 ½ you will owe a 10% federal penalty tax on top of any regular federal, state, and local income taxes.
Liquidity: Can you get access to the money when you want or need. In general, you can withdraw the money from an IRA when you want. Company sponsored 401k plans may have certain restrictions on when and how often you can withdraw from the plan. Carefully read and understand your rights to access to plan funds after leaving or upon retirement. Both 401ks, upon leaving a company, and IRAs will be subject to the required minimum distribution (RMDs) during your lifetime. If you convert to a Roth IRA those assets are exempt from RMDs and you can withdraw them on your own schedule.
Investment Options: Carefully review the investment options at a 401k vs. an IRA. Typically, 401k plan sponsors have hired an advisor to pre-select a list of funds for the plan. Many plans may provide anywhere from 10 to 20 funds to invest in. An IRA account will provide you much wider selections of stocks, bonds, and many funds to choose from.
Fees and expenses: Check the price tag of what you choose. Plan participant fees, fund management fees, fund operating expenses, and 12b-1 fees are usually hidden fees that you don’t see on your statement. Before deciding to stay in a 401k plan or roll into an IRA, make sure the plan expenses are not excessive. There are typically less expensive and better investment options available with an IRA.
Investment Advice: Special service and investment advice can be a valuable offering at a 401k plan if it is provided. Many plans however do not offer any individual investment advice. Using an adviser at a bank, broker, or independent investment adviser like Greenwich Advisors may offer additional benefits that can be had with an IRA.
Partnering with Greenwich Advisors can help you navigate the many investment issues you may face after you leave an employer. These are just some of the more important factors to consider when rolling over retirement assets, but If you or someone you know has any specific questions, or needs help with an old 401k, please feel free to contact us.