Did you lose your job?
Know how to preserve your retirement savings
You are planning to leave your current employer. Maybe you’ve lost your job or are making a voluntary job change. Maybe you’re ready to retire.
You may have a 401k and are needing to figure out if you want to leave it in your current plan, rollover the balance to an IRA, or take a withdrawal and pay taxes now.
This may seem like a straightforward decision. Rolling over your 401k is the obvious move, except that perhaps it is not. Maybe rolling it over isn’t the answer. Each option has pros and cons and mistakes could be expensive.
A number of significant issues call for consideration when making this decision. Some of those include:
1. How old are you? If you’re retiring or have lost your job, you may need access to this money before 59.5 years-of-age. If you’re at least 55, 401k plans allow you to access your investments without penalty. Unless you have non-retirement assets you can access, you may want to play it safe and keep the money in the plan.
2. Do you need creditor protection or are you thinking about bankruptcy? In general, both 401ks and IRAs are protected assets from creditors in bankruptcy. It’s the non-bankruptcy creditor protection for IRAs that can get more complex, as this is governed by state laws. Consequently, if you roll over your 401k into an IRA, you may have less protection from creditors in a non-bankruptcy situation. If this is a potential issue, be sure to get the appropriate legal advice before the rollover.
3. Do you have outstanding loans? If you’ve left your job, most require that you pay back the loan quickly. If you don’t, then the balance will be taken from your account and it’s considered a taxable distribution. If you’re under 59.5 years old, then you’ll not only pay taxes but the 10 percent penalty as well.
There is no “one size fits all’ answer to the question. There are many other issues that you should review before making the decision. Get some help from someone with your best interests in mind before you make the decision.
There are many good reasons to rollover your 401k to an IRA. Those include:
1. You want personalized, professional advice. You want help developing and monitoring a plan to help you get into retirement and stay there.
2. You want to have a wider array of investments to choose from and an advisor that can help you choose investments that will work for you.
3. You want to simplify your life by having all accounts managed by one advisor.
4. You may want increased distribution flexibility. IRAs make it easier to take normal distributions. There’s typically minimal paperwork and you can choose how much, if any, you’d like to be withheld for taxes. Withdrawals from 401ks can be more cumbersome and they have a mandatory 20 percent federal income tax withholding.
5. You can also make charitable contributions after 70.5 years old from an IRA – not available in the 401k.
Teresa R. Sanders, MBA, RICP, CFP, Aspen Wealth Management, Inc.