What should I do with my 401(k) (or other retirement plan) when I leave my job or retire?
This question is one of the most common questions we receive.
401(k) and Other Employer Retirement Plan Rollovers
Most people approach retirement with much, if not most, of their net worth in 401(k) or other types of retirement plans.
Making the proper decision about a 401(k) rollover is a critical component of retirement planning.
It may or may not be in your best interest to move your 401(k), 403(b), 457 plan, TSP, or other company retirement plan when you leave your company or retire. Most financial advisors, by default, recommend rolling your plan into an IRA. This may be the best option - but then again, it may not.
Unlike many firms, PARAGON can help you manage your 401k whether you move it to an IRA, or leave it with your employer. Thus, we have no economic incentive to recommend an IRA rollover if you would be better off keeping your 401k where it is.
Is Moving My 401(k), 403(b), 457, or TSP in My Best Interest?
As a fiduciary, we must recommend what appears to be in your best interest. Below are some Pros and Cons for you to consider. Choosing incorrectly can cost you thousands of dollars in taxes, reduced investment returns, liquidity, and opportunities to leave money to your heirs. It is important to get the rollover decision right - and we can help you.
reasons to roll your retirement plan to an IRA
Below are a few of the reasons that clients rollover their company retirement plans to an IRA with PARAGON. It is important to do it CORRECTLY. Incorrectly performing a rollover of your retirement plan may cause you significant taxes, penalties and hassles that a correct 401(k) rollover would avoid. We have performed hundreds of rollovers correctly, without tax consequences, for our clients when it was appropriate.
Your employer retirement plan is an older, more expensive plan. Many employer retirement plans have high costs which reduce returns. With recent regulatory and legislative emphasis on 401(k) plans, this situation is improving, but many retirement plans still suffer from high fees and investment costs which can be lowered by rolling those dollars to an IRA.
Your company retirement plan has limited investment options. According to the Investment Company Institute and Brightscope research conducted in 2014, retirement plan offers 25 investment options. While 25 may seem like a lot, we often find many of the investments are only duplicates of each other. Some plans lack asset classes that are vital to building an efficient portfolio. For example, many plans eliminate options such as international bonds, small stocks, real estate, or health care.
Your employer retirement plan has limited distribution options. Many plans limit the ways in which you can take money from the plan. Some plans only offer annual withdrawals, while others offer only a single lump sum payment or an annuity (monthly paycheck) option. If you have unexpected emergencies, or your retirement goals include occasional travel, weddings, gifts, or home remodeling projects - limited options can be frustrating. An IRA, on the other hand, has no limitations on how or when you make withdrawals from your own account.
Your plan has limited beneficiary options. Many company retirement plans do not allow you to leave your money to a trust set up for your beneficiaries. Additionally, FEW plans allow your heirs to "Stretch" the retirement plan once you have died. (The "Stretch" option means that non-spouse heirs can take annual withdrawals over their lifetime in order to prevent a forced taxable payout of the plan after you have died.) The tax implications of this limitation are tremendous. If you desire for your children or grandchildren to enjoy your 401(k) or 403(b) dollars for their lifetime, or for them to enjoy the creditor protection that a separate IRA trust can provide - then most likely an IRA rollover will have to be performed.
Required Minimum Distributions can be difficult. If you are retired and over age 70 and 1/2, you must make withdrawals from your retirement plan based upon a schedule found in IRS Pub. 590. If these withdrawals are not taken on time, you will face a 50% tax penalty on dollars not withdrawn. If you have several retirement plans, you must make these distributions out of each and every plan. Most people choose to consolidate their 401(k)’s or other retirement plans into one IRA for simplicity of record keeping.
Mandatory 20% Tax Withholding. Retirement Plans are required to withhold a mandatory 20% tax on taxable distributions - whereas an IRA has no such requirement.
Even Roth 401k(s) are subject to Required Minimum Distributions. Even if your 401k has post-tax or Roth dollars, these dollars are still subject to being forced out of the account according to the IRS's Required Minimum Distribution schedule. However, if you roll these assets directly to your own Roth IRA, you are not forced to withdraw these funds on the government's schedule.
You don't want your old company "knowing your business." This is one of the more common reasons that people rollover their 401(k), 403(b), or TSP when they leave or retire, and is self-explanatory.
The above list is only a few of the reasons that clients rollover their company retirement plans to an IRA with PARAGON. Remember - it is critical to do it CORRECTLY. At PARAGON, we have performed hundreds of rollovers correctly, without tax consequences, for our clients when it was appropriate.
Reasons Not to Roll your company retirement plan to an IRA
You are not yet Age 59 and 1/2. Unlike IRAs, where you must be age 59 and 1/2 before taking distributions (ignoring exceptions), an employer retirement plan allows penalty-free distributions beginning at age 55, as long as you separate from that company after you turn 55. If you roll your 401(k) to an IRA, you lose this option. If you feel you may need access to your funds between ages 55 and 59 and 1/2, then you should consider leaving your retirement plan with your employer.
You have a large position of highly appreciated company stock in your 401(K). If this is the case, we may want to explore if you have NUA (Net Unrealized Appreciation) treatment available in the plan. NUA treatment allows you to move the stock directly from your plan into a brokerage account - pay income tax only on the cost basis of the stock, and then, if you hold your stock for at least one year, sales of the stock are taxed as long term capital gains instead of as ordinary income. This difference may mean substantial tax savings over the course of your retirement. Additionally, unlike IRAs and employer retirement plans, there is no requirement for you to sell the stock at all - which means that you are never forced to pay taxes on these dollars if you do not need them. We can help you determine if NUA treatment makes sense for you.
You have certain irreplaceable investments in your plan that you like. These are found more commonly in 401(k) plans than in 403(b), 457, or TSP accounts. Some company plans offer a "Stable Value" fund that guarantees a certain interest rate and has no volatility; other company plans offer "private label" investments that are not available elsewhere. If this is the case, you may wish to keep some of your dollars in your employer retirement plan as opposed to rolling them to an IRA.
Rollover or no rollover – either way, we can help
As mentioned above, PARAGON helps clients manage all of their retirement funds - not just the ones rolled over to an IRA account with one of our custodians. As a fee-only investment advisory firm, we have many clients who depend upon our watchfulness and expertise to manage their employer retirement accounts - right where they are - with their employer. Few financial advisory firms offer this service, but we believe that it is necessary to take a holistic approach to retirement planning in order to achieve the best results. After all - why would any financial advisor who is truly acting in your best interest - ignore what may be your very largest asset?