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Your 401(k) When You Retire

September 9, 2019 By E.J. Smith

By Tashatuvango @ Shutterstock.com

As you know the retirement investment landscape is ever-changing as discussed with the proposed Secure Act. Make sure you know the rules so you don’t unknowingly cross the line and subject your account to penalties. There’s a reason they make this stuff confusing. Here Fidelity explains what you can do with an old 401(k):

Key takeaways

  • 4 options for an old 401(k): Keep it with your old employer, roll over the money into an IRA, roll over into a new employer’s plan, or cash out.
  • Make an informed decision: Find out your 401(k) rules, compare fees and expenses, and consider any potential tax impact.

Changing or leaving a job can be an emotional time. You’re probably excited about a new opportunity—and nervous too. And if you’re retiring, the same can be said. As you say goodbye to your workplace, don’t forget about your 401(k) or 403(b) with that employer. You have several options and it’s an important decision.

Because your 401(k) may be a big chunk of your retirement savings, it’s important to weigh the pros and cons of your options and find the one that makes sense for you.

Here are 4 choices to consider.

1. Keep your 401(k) with your former employer

Most companies—but not all—allow you to keep your retirement savings in their plans after you leave.

Some benefits:

  • Your money has the chance to continue to grow tax-deferred.
  • You can take penalty-free withdrawals if you leave your job at age 55 or older.
  • Many offer institutionally priced (i.e., lower-cost) or unique investment options.
  • Federal law provides broad protection against creditors.

But:

  • If you have less than $5,000 in the plan, the money may be automatically sent to you (or sent to an IRA for you).
  • If you choose to keep the money in your former employer’s plan, you won’t be able to add any more money to the account, or, in most cases, take a 401(k) loan.
  • Withdrawal options may be limited. For instance, you may not be able to take a partial withdrawal; you may have to take the entire balance.
  • After you reach age 70½, you’ll have to take annual required minimum distributions (RMDs) from a traditional 401(k).

If you hold appreciated company stock in your workplace savings account, consider the potential impact of net unrealized appreciation (NUA) before choosing between a rollover or an alternative.

Read Viewpoints on Fidelity.com: Make the most of company stock

2. Roll over the money into an IRA

A Rollover IRA is a retirement account that allows you to move money from your former employer-sponsored retirement plan, into an IRA.

You can open the IRA with a bank or brokerage firm.. Make sure to research fees and expenses when choosing an IRA provider, though. They can really vary.

Some benefits:

  • Your money has the chance to continue to grow tax-deferred.
  • If you’re under age 59½, you can withdraw money penalty-free for a qualifying first-time home purchase or higher education expenses.2
  • You may be able to get a broader range of investment choices than is available in an employer’s plan.

But:

  • After you reach age 70½, you’ll have to take annual required minimum distributions (RMDs) from a traditional IRA (but not a Roth IRA1) every year, even if you’re still working.
  • Federal law offers more protection for money in 401(k) plans than in IRAs. However, some states offer certain creditor protection for IRAs too.

3. Roll over your 401(k) into a new employer’s plan

Not all employers will accept a rollover from a previous employer’s plan, so check with your new employer before making any decisions.

Some benefits:

  • Your money has the chance to continue to grow tax-deferred.
  • Having only one 401(k) can make it easier to manage your retirement savings.
  • Many plans offer lower-cost or plan-specific investment options.
  • Federal law provides broad protection against creditors. You can defer RMDs even if you’re still working after age 70½.3

But:

  • Make sure to understand your new plan rules.
  • Consider the range of investment options available in the new plan.

4. Cash out

Taking the money out of retirement accounts altogether should be avoided unless the immediate need for cash is critical and you have no other options. The consequences vary depending on your age and tax situation. If you withdraw from your 401(k) before age 59½, the money will generally be subject to both ordinary income taxes and a potential 10% early withdrawal penalty. (An early withdrawal penalty doesn’t apply if you stopped working for your former employer in or after the year you reached age 55, but are not yet age 59½. This exception doesn’t apply to assets rolled over to an IRA.)

A $50,000 cash out before age 59½ could cost $20,500 in penalties and taxes

This example assumes the following: A hypothetical 24% federal marginal income tax rate, a hypothetical 7% state income tax, and a standard 10% penalty for early withdrawal. This example is for illustrative purposes only. Please note that the 10% early withdrawal penalty does not apply to distributions made to an employee after separation from service after age 55. The withdrawal will still be subject to income taxes.

If you are under age 59½ and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash. Obviously that’s only possible if your former employer allows partial withdrawals—or if you roll the account into an IRA.

How the rollover is done is important too

Whether you pick an IRA for your rollover or choose to go with your new employer’s plan, consider a direct rollover—that’s when one financial institution sends a check directly to the other financial institution. The check would be made out to the bank or brokerage firm with instructions to roll the money into your IRA or 401(k).

The alternative, having a check made payable to you, is not a good option in this case. If the check is made payable directly to you, your employer is required by the IRS to withhold 20% for taxes. As if that wouldn’t be bad enough—you only have 60 days from the time of a withdrawal to put the money back into a tax-advantaged account like a 401(k) or IRA. That means if you want the full value of your former account to stay in the tax-advantaged confines of a retirement account, you’d have to come up with the 20% that was withheld and put it into your new account.

If you’re not able to make up the 20%, not only will you lose the potential tax-free or tax-deferred growth on that money but you may also owe a 10% penalty if you’re under age 59½ because the IRS would consider the tax withholding an early withdrawal from your account. So, to make a long story short, do pay attention to the details when rolling over your 401(k).

Make the best decision for you

When it comes to deciding what to do with an old 401(k), there may be factors that could be unique to your situation. That means the best choice will be different for everyone. One thing to remember is that the rules among retirement plans vary so it’s important to find out the rules your former employer has as well as the rules at your new employer.

Do also compare the fees and expenses associated with the accounts you’re considering. If you find it confusing or overwhelming, speak with a financial professional to help with the decision.

Read more here.

Originally posted on Your Survival Guy.

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E.J. Smith
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. His focus at all times is on preparing clients and readers for “Times Like These.” E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart (RIP) of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris.

Please get in touch with E.J. at ejsmith@youngresearch.com
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