By Jenn King

Key Takeaways:

• If you keep your 401(k) in the Employer Plan and you are age 55 or older, you can take withdrawals from the plan without paying the 10% penalty.

• If you roll the money over into an IRA you have more investment options; and if you are under age 59 ½, you can take distributions for higher education expenses or as a first-time home buyer without paying the 10% penalty.

• You can combine multiple 401(k)s into one IRA for simplification.

• If you are under 59 ½ and cash out all at once, you will pay a 10% IRS penalty and income taxes on the entire amount.

So, you’ve finally let the company know that you are ready to retire. You’ve given them notice of your last day and now they are scrambling to make sure they are prepared for your departure.

You’ve already done your planning.  You know your plan looks great and you are ready to take some well-deserved time for yourself.  But have you thought of everything?  What about that 401k – what are your options?  Should you rollover your IRA or keep it in the plan?  Or maybe you cash it out and take that trip of a lifetime you’ve always wanted to do?  Let’s take a look at your options. 

OPTION 1 - Keep your 401k in the Employer Plan

Some things won’t change:

• Investment Options –You’ll have the same investment options.  If you are happy with the options, that may be fine.  If you are looking for broader investment choices and better diversification in your retirement account, there are likely better options out there.

• The investments are institutionally priced, so they are typically low cost. However, it will be important to review your annual 401(k) disclosure to be clear on the true cost.

• Your account grows tax-deferred and if you take withdrawals from the account you will pay ordinary income tax on the entire withdrawn amount. 

Some considerations:

• If you have less than $5,000 in the plan, the money will be automatically sent to you.

• Any time you take a distribution from the plan, they will automatically withhold 20% for taxes.  You do not have the option to NOT withhold. 

• You will have to take Required Minimum Distributions (RMDs) when you turn age 72.  However, instead of being able to aggregate your RMD’s from one account, your 401k will require you take out your RMD from your 401k in addition to your potentially aggregated RMD from a single IRA.

A good reason to keep it in your Employer Plan?

• If you have planned well enough to retire before the age of 59 ½, as long as you are age 55 or older, you can take withdrawals from the plan WITHOUT paying the 10% penalty.  You still have to pay ordinary income taxes, but the penalty becomes a non-issue.

OPTION 2 – Roll the money over into an IRA

What won’t change:

• Your money continues to grow tax-deferred.  With the roll over, there are no tax implications if you move the money from the employer plan directly into the IRA. 

Some considerations:

• Fees and expenses can vary between different providers.  It will be important to do your research to make sure you understand how much you are paying for your investment advice.

A good reason to roll it over into an IRA?

• Investment Options – you will have many more investment options to choose from than your employer plan

• Strategic Tax Planning – When you take distributions, you can choose to withhold taxes or pay taxes when you file your taxes at the end of the year.

• If you are under age 59 ½ you can take distributions for higher education expenses or as a first time homebuyer without paying the 10% penalty.

• Simplification – you may want to combine your individual retirement accounts from your past employers into one IRA that will allow you easier management of your money as you age.

OPTION 3 – Cash Out!

This is absolutely the LAST thing you want to do with your 401(k) when you retire.  Why? Because every dollar of your withdrawal is going to be taxed as ordinary income – ALL AT ONCE!  And if you are under 59 ½ then you will also pay a 10% penalty on that money. 

Let’s say your 401k is worth $250,000.  You file Married Filing Jointly on your tax return.  If there is no other income, you will pay about $42,000 in taxes.  If you are also under age 59 ½ then you will pay an additional $25,000 early withdrawal penalty.  So what are you left with?  $183,000.  That’s a tough pill to swallow when you worked all of those years to save for retirement!

The bottom line is that this is an individual decision as only you know your cash flow needs, tax situation and retirement goals.  It is important that you do your due diligence and thoroughly explore your options or work with a Financial Planner to help evaluate the best steps for you and your family.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Paragon Wealth Strategies, LLC [“Paragon”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.  Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from Paragon.  Please remember that if you are a Paragon client, it remains your responsibility to advise Paragon, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Paragon is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the Paragon’s current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.wealthguards.com. Please Note: Paragon does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to Paragon’s web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Also Note: IF you are a Paragon client, Please advise us if you have not been receiving account statements (at least quarterly) from the account custodian.