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401(k) Options After Separation from Service or In Retirement


When you have a job change or are facing retirement there are a number of decisions that need to be made. One of the more significant ones is what to do with your 401(k). The choice may seem straight-forward but it is anything but. When making this decision it is critical to weigh in all the factors to your decision.

IRAs maintain the same kinds of tax benefits as your 401(k) in terms of the tax-deferred status but offer a greater number of investment options. Most times 401(k)s are limited to under 20 or less investment options that encompass the basic categories of investments (ranging from large cap stocks to international funds to some simple bonds). However, under the IRA your retirement savings can be invested in a plethora of choices from individual stocks, ETFs and mutual funds.

Additionally, if you have multiple 401(k)s and/or other types of retirement accounts consolidation can assist you with ease of management and tracking of your retirement investments. Often times, when transitioning into retirement most people want life to become simpler and the consolidation advantage of the IRA allows that.

At this point, you are probably thinking this is an easy choice but not so fast! There are some very important rules and options you should be aware of before you make your decision.

If you are considering an early retirement (any time before 59 ½) the 401(k) allows distributions after 50 years old whereas IRAs are subject to federal/state penalties (in addition to income tax) on withdraws prior to 59 ½ years old. Avoiding early withdrawal penalties and being able to withdraw retirement funds early are significant advantages to an overall retirement plan.

Additionally, some 401(k)s or deferred compensation plans offer Annuity or Survivor options upon retirement. Some of these options can be worth your while during retirement, especially with the survivor benefit options. With this option the best way to make an informed decision is to calculate the return that you will be receiving and compare those to the potential returns that one might receive in an IRA Rollover.

Another item of due diligence that should inform your decision is on fee structures. Some 401(k)s can be pricey, others can quite inexpensive. 401(k) fees depend on the size of the 401(k) and are compounding by the vital professionals that it takes to run the plan (the custodian, record keeper, third-party admin and the investment advisor). However, there can be instances when the IRA is more expensive. Be sure to compare the fees of each.

If you have credit issues the 401(k) has Federal Laws to shelter your nest egg from creditors. Under ERISA, 401(k) funds qualify for protection (with the exception of a solo 401(k)). However, if you rollover your funds to an IRA, those funds only continue to have protection from seizure by creditors during a bankruptcy event. This varies by state, so be certain to check the provisions in your state. In California, IRAs enjoy (non-bankruptcy event) protections however, only to the extent that the assets are necessary to support the debtor and their dependents.

As always, we are here to help. If you have any questions about your 401(k) options, contact us to discuss your options.



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Saturday, 09 December 2023

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