401k and Other Employer Retirement Plan Rollovers
What should I do with my 401k (or other retirement plan) when I leave my job or retire? This question is one of the most common questions we receive as we work with clients who are approaching retirement. For many people, preparing for retirement has included diligently investing in a 401k or other employer sponsored retirement plan for many years. As a result, most people who are approaching retirement have much, if not most, of their net worth in these plans. Accordingly, making the proper decision about a 401k rollover, in the proper way, can be a critical component of enjoying a successful retirement.
It may, or it may not, be in your best interest to move your 401k, 403b, 457, TSP, or other company retirement plan when you leave your company or retire. There are multiple contributing factors that must be weighed. Most financial advisors, by default, recommend rolling your plan into an IRA. This action may, in fact, be the best option - but then again, it may not. Unlike most financial advisory firms, PARAGON can help you properly implement your investment strategy whether you leave your retirement plan with your employer when you leave or retire - or whether you move it to an IRA under our management. As such, we have no economic incentive to recommend that you move your 401k if it is in your best interest to leave it with your employer.
Is Moving My 401k, 403b, 457, or TSP in My Best Interest?
As a fiduciary, by law we must recommend what, based upon all of the information that we have at the time, appears to be in your best interest. In support of that tenet, below are some of the most common Pros and Cons for you to consider. Choosing incorrectly can cost you thousands of dollars in taxes, lost opportunities, reduced investment returns, liquidity, and critical opportunities to pass the most money to your heirs. It is important to get the rollover decision right - and we can help you.
Common Reasons to Roll your 401k, 403b, 457, or TSP to an IRA
- Your employer retirement plan is an older, more expensive plan. Many employer retirement plans have high (and often hidden) fees which drastically reduce investor returns. With recent regulatory emphasis on this particular issue, this situation is most definitely improving. However, the fact remains that many employer retirement plans still suffer from high administrative fees and high investment costs which can be mitigated by rolling those dollars to an IRA.
- Your plan has limited investment options. According to the Investment Company Institute and Brightscope research conducted in 2014, the average 401k or 403b plan offers 25 investment options. While initially this may seem like a lot, we often find many of the investments are actually duplicates of each other. Most plans eliminate asset classes that are vital to building an efficient portfolio designed to maximize return within a given unit of risk. For example, many plans eliminate investment options such as international bonds, international small company stocks, real estate, health care, and gold. Additionally, if you desire to invest in individual stocks or bonds, this is usually not possible in an employer retirement plan.
- Your employer retirement plan has limited distribution options. Many plans limit the ways in which you can take income from the plan. Some offer only annual withdrawals, others offer only a single lump sum payment and/or an annuity (monthly income stream) option. In the event that you have unexpected emergencies or your retirement goals include occasional travel, weddings, gifts, or home remodeling projects - you may find these limited withdrawal options to be quite frustrating. Your own IRA, on the other hand, has virtually no limitations on how, or when, you make withdrawals from your own account.
- Your plan has limited beneficiary options. Many 401k, 403b, 457, or TSP plans do not allow you to leave your money to a trust set up for your beneficiaries. Additionally, FEW plans in existence will allow your heirs to "Stretch" the retirement plan once you have died. (The "Stretch" option means that your non-spouse heirs can take annual withdrawals over their lifetime in order to prevent a forced taxable payout of the plan soon after you have died.) The tax implications of this limitation are tremendous to your non-spouse heirs - and if you desire for your children or grandchildren to enjoy your 401k or 403b dollars for their lifetime - then an IRA rollover should most certainly be considered.
- After age 70 and 1/2, if you are no longer working, you are required to make mandatory minimum withdrawals from your retirement plan based upon a schedule found in IRS Publication 590. These are known as RMDs (Required Minimum Distributions) and must be performed, at a minimum, according to the set schedule, or under current tax rules you will face a 50% tax penalty on any dollars not withdrawn. If you have several retirement plans, you must make these distributions out of each and every one of them. Most people choose to consolidate their 401k or other retirement plans into one account for simplicity of record keeping. Additionally, the plan is required to withhold a mandatory 20% tax on your distribution - whereas an IRA has no such requirement.
- You have left your company - and you no longer want your company involved in "your business." This is actually one of the more common reasons that people rollover their 401k, 403b, or TSP when they leave or retire, and is self-explanatory.
- You have multiple 401k, 403b, or TSP - type plans. Not only is it very difficult to create and execute a sound investment policy with multiple accounts, but the recordkeeping required to comply with your Required Minimum Distributions beyond age 70 and 1/2 will become quite burdensome. It is our experience that as people age, they prefer to simplify their finances, not make them more complex. In this case, it would make sense, at the very least, to consolidate these accounts into one. A single, low-cost IRA with a fully-diversified investment portfolio custom-built to your particular needs and risk tolerance is often the best choice, especially given the possibility of owning individual bonds as part of the fixed income portion of your account.
The above list is certainly not exhaustive - but merely a few of the many reasons that clients desire to rollover their retirement plan to an IRA. If you choose to do so - it is important to do it CORRECTLY. Incorrectly performing a rollover of your company retirement plan may cause you significant taxes, penalties and hassles that a correct 401k rollover would avoid. At PARAGON, we have performed hundreds of rollovers correctly, without tax consequences, for our clients when it was appropriate to do so.
Common Reasons Not to Roll your 401k, 403b, 457, or TSP to an IRA
- You are not yet age 59 and 1/2. Unlike IRAs, which generally require that you reach age 59 and 1/2 before taking distributions (ignoring exceptions), an employer retirement plan generally allows penalty-free distributions beginning at age 55, as long as you are separated from that company, your separation occurred after your age 55, and you leave the 401k, 403b, or TSP plan there with the employer. If, on the other hand, you were to roll your 401k to an IRA, you would lose this early distribution option. If you feel you may need access to your employer retirement plan funds between ages 55 and 59 and 1/2, then you should consider leaving your retirement plan with your employer, as long as it is a low-cost plan and you are happy with the investment options provided. If the plan is high cost or has insufficient investment options, or if your separation occurs prior to age 55, then you might wish to consider a 72T IRA instead - which we can set up for you.
- You have a large position of highly appreciated company stock in your 401k. If this is the case, then the most prudent course of action would be for us to help you explore if you have NUA (Net Unrealized Appreciation) treatment available. NUA treatment, if available, allows you to distribute the stock directly from your plan into a brokerage account - and afterwards, if you hold your stock for at least one year, sales of the stock at a future point in time are taxed as capital gains instead of ordinary income,. This difference in tax treatment can mean substantial 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 not forced to pay taxes on these dollars during your lifetime if you do not need them. It is important to know, however, that when you distribute the stock to your brokerage account - you must pay regular income tax on the cost basis of the stock at that time. Our team can assist you with the tax analysis on an NUA option, to determine if it makes sense for you.
- You have certain irreplaceable investments in your plan that you like. These are found more commonly in 401k plans than in 403b, 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.
- Is your employer retirement plan an extremely low-cost plan with adequate investment options? If this is the case, it may make sense for the dollars to remain exactly where they are, especially if you are very familiar with the plan and have been successful with it over time. Sometimes, if it isn't broke, it does make sense not to fix it.
Rollover or No Rollover - Either Way, We May Be Able to Help You
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 financial and 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?
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™ and federally registered CFP (with flame logo) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.
Investment Advisory Services Provided by Paragon Wealth Strategies, LLC, a registered investment adviser.