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Several strategies are available, each with their own pros and cons.
I have an old 401(k) account with a former employer. Should I leave it there for as long as they’ll let me? If not, what are my options?
Generally, you have four options when it comes to your old employer-sponsored retirement plan. You may be able to leave it with the old employer, you can roll it into your new employer’s retirement plan (if eligible), you can roll the money into an Individual Retirement Account rollover account, or you can take a cash distribution. Each of these alternatives has advantages and disadvantages.
For many individuals, taking a cash distribution is the least desirable option since any distributed amount not rolled into a new plan will be subject to income taxes and a 10% penalty if you are under age 59½. The taxable portion will be counted as ordinary income during the year of distribution and could result in moving you into a higher tax bracket. Due to the severity of the taxes and penalty, cash distributions should only be considered in cases of true financial hardship such as foreclosure, eviction, or repossession.
If the plan permits, leaving the retirement account with your former employer has some advantages, such as familiar investment options and possibly lower fees. Additionally, if it is a qualified retirement plan, it may offer protection from malpractice lawsuits and other creditors. Before making the asset protection feature a deciding factor, check if your new employer plan offers the same protections. Many of them do.
It may make more sense, however, to roll the funds into the qualified retirement plan provided by your new employer or into an IRA rollover. Retirement assets left with previous employers can be forgotten (yes, it happens!), or the previous employer may change names or be acquired down the road. This can make tracking down these old plans very difficult and time consuming. Therefore, consolidating your retirement accounts through a rollover may be the better option. It simplifies the management of your retirement savings by combining multiple accounts into just one or two.
When deciding whether to roll your account(s) into your new employer’s plan or an IRA, it is important to examine the differences between the two vehicles. Both will maintain the tax benefits of the previous account, and no taxes or penalties are incurred by moving the funds. The biggest difference between the two account types is the available investment options. Your new employer’s plan may only offer a limited selection of investment options. The number of funds could range from less than 10 investment options to dozens. These funds may have a history of strong performance with low fees or they could not.
It is important to review the options before committing to rolling the funds into that plan. An IRA rollover, on the other hand, allows you to invest in any publicly traded security. You may be able to find better-performing funds that have lower internal expense ratios.
Next:"Another difference between the two rollover options is the cost"Another difference between the two rollover options is the cost. When using your employer’s retirement plan, the cost may be assumed by the employer. This includes paying a record keeper, a third-party administrator, and often an investment adviser. The employee just needs to pay the internal expense ratio of the funds themselves. With an IRA rollover, the responsibility of paying an investment adviser may fall to the individual investor.
If an individual does not have extensive experience selecting funds and designing an investment allocation, working with an adviser is recommended. Most advisers charge a fee for their services and that should be factored into the decision.
Due to the complexity of each option and the consequences involved, we recommend speaking with a financial adviser to determine the best option for you.
We have finally scheduled an appointment with our attorney to prepare an estate plan. What should we do in preparation for the meeting?
Estate planning can range from simple and straightforward to sophisticated and complex. The starting point, prior to meeting with the attorney, would be to prepare a complete list of assets, including investments, retirement accounts, insurance policies (death benefit as well as any cash value), real estate, and any business/practice interests. Next, decide what you want to do with those assets: who should inherit them, who should manage your estate, and who should make significant decisions if you become incapacitated. This will provide a nice framework for the attorney to begin the process.
Mr. Witz is educational program director at MEDIQUS Asset Advisors, Inc. in Chicago. He welcome readers’ questions and can be reached at 800-883-8555 or firstname.lastname@example.org.
The information in this column is designed to be authoritative. The publisher is not engaged in rendering legal, investment, or tax advice.