When to Ask for Professional Help
“Retirement is like a long vacation in Las Vegas. The goal is to enjoy it to the fullest, but not so fully that you run out of money.”
~ Jonathan Clements, British Author, founder of the Humble Dollar website.
Question: When I retire should I move my 401(k) account into my IRA? I’ve heard about rollovers but don’t fully understand what’s involved.
Answer: As with most financially based decisions, the answer depends on your unique situation. Most retirees roll their 401(k) into their Individual Retirement Account (IRA) to avoid tax ramifications and to continue benefitting from tax-deferred growth. Some employers don’t allow retirees to keep assets in the employer plan indefinitely. Rolling over your 401(k) into an IRA may provide greater flexibility and more investment choices but there are other factors to consider.
You’ll want to find out if your 401(k) plan allows partial distributions, or if it mandates a one-time lump-sum distribution. Another consideration is whether your 401(k) consists of any Roth contributions in addition to classic before-tax contributions. This is something your CERTIFIED FINANCIAL PLANNER™ Professional can help you determine. Also, will you need to take distributions from the two types of contributions on a pro-rata basis? This means withdrawing funds from both the Roth (after tax) and traditional (pre-tax) contributions based on ratios of each type of asset. Or you may be able to simply take withdrawals from whichever is optimal for your situation.
When planning, it is generally best to avoid withdrawals until necessary to avoid taxation and wait for required minimum distributions (RMDs) which will be included in ordinary income for tax planning purposes. RMDs do not apply to Roth IRAs or Roth assets in a 401(k) account. Control over distributions may provide greater tax efficiency when planning for your retirement years.
Investment options and choices could be another difference and consideration when deciding to keep your 401(k) or roll funds into an IRA. Compare the investment options in your plan with those that your CFP® Practitioner may recommend. IRAs typically have more choices than workplace plans. A rollover into an IRA could give your more choices and control.
Large plans could have investment options at a lower cost with institutional pricing. Some plans may not let you specify which investments you sell for distributions. Keep in mind how much involvement you’d like to have and if the benefits of collaborating with an advisor for guidance are important to you.
Don’t forget to incorporate other sources of income when making your decisions. Social Security benefits should be part of your calculations. It’s probably beneficial to wait to claim Social Security until age 70, the longer you wait the higher your monthly benefit. You’ll need to begin taking RMDs by April 1 of the year after you turn 73 whether it’s still in your 401(k) or an IRA, or a combination of both. Will you have the same flexibility when identifying which holdings to liquidate for your RMDs. Also, does the employer plan accommodate Qualified Charitable Distributions? This is a technique to maximize philanthropic donations from your IRA directly to a 501c 3 organization, something that your CFP® Planner can help you decipher when making decisions.
Holding shares of highly appreciated company stock in your 401(k) is a special factor to consider. Embedded capital gains or net unrealized appreciation (NUA) in 401(k) is common for those who work at companies with publicly traded stock that they’ve invested in within a retirement account. Navigating this terrain may require the assistance of a trusted advisor and team of financial professionals and can make a tremendous difference in certain cases. Techniques to take advantage of substantially lower long-term capital gains tax rates versus ordinary income tax rates could make a substantial difference in your planning. Situations incorporating corporate stock can be more complex and asking for help could be beneficial.
The discussion of rollovers requires the following regulatory language: If you’ve changed jobs or are retiring, rolling over your retirement assets to an IRA can be an excellent solution. It is a non-taxable event when done properly and give s you access to a wide range of investments and the convenience of having consolidated your savings in a single location. In addition, flexible beneficiary designations may allow for the continued tax-deferred investing of inherited IRA assets. In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us.
- Leave money in your former employer’s plan, if permitted. Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event.
- Roll over your assets to your new employer’s plan, if one is available and it is permitted. Pro: Keeping it all together and larger sum of money working for you, not a taxable event. Con: Not all employer plans accept rollovers.
- Rollover to an IRA. Pro: Likely more investment options, not a taxable event, consolidating accounts and locations. Con: usually fee involved, potential termination fees.
- Cash out the account. Con: A taxable event, loss of investing potential. Costly for your individuals under 59 ½; there is a penalty of 10% in addition to income taxes.
Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.
As you can see there is much to consider when managing retirement assets. Outlining pros and cons, advantages, and disadvantages of keeping your 401(k) after separation of service through either retirement of moving to another position will help you make the best decision for your situation. The right choice depends on your comfort level of going it alone. Your decision will likely be based on preferences for flexibility, features, investment options, distributions, and whether you’d like guidance. Stay focused and plan accordingly.
The opinions expressed are those of the writer as of February 25, 2024, but not necessarily those of Raymond James & Associates, and subject to change at any time based on market conditions and other factors. There is no guarantee that these statements, opinions, or forecasts provided herein will prove to be correct. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including asset allocation and diversification. Please consult your independent legal counsel and/or tax professional regarding any legal or tax issues raised in this material. Raymond James and its advisors do not offer tax or legal advice.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL Main™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
This article provided by Darcie Guerin, CFP®, First Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC.
