IRA rollovers: Decisions, decisions
July 3, 2014
Determining what to do with your 401(k) or other type of company-sponsored retirement plan may be one of the most important financial decisions you’ll ever make. The consequences of this decision could significantly impact the assets you’ll have available in the future and your financial well-being.
When it comes to getting the most out of the assets in their retirement plan, employees considering a change in jobs or retirement have four options.
Option 1: Stay invested in your current plan. In most circumstances, you can leave your money invested in your current employer’s plan. While often the easiest approach, this method can be very restrictive in that your investment and distribution options are limited to what that employer offers.
Option 2: Receive a cash distribution. Although the temptation to spend your retirement plan savings may be strong, receiving a cash distribution may mean incurring 20 percent withholding taxes at a higher tax bracket and an additional 10 percent penalty if you take the distribution before you turn 55, both of which can negatively impact your financial stability in retirement.
Option 3: Switch to a new employer’s plan. If your new plan accepts retirement assets from previous plans, you may be able to roll over your existing retirement money to your new employer’s qualified retirement plan. However, moving your assets to another qualified plan means your investment options will be limited to those offered by the new employer’s plan. In addition, your ability to access your money will also be subject to the rules under the new plan.
Option 4: Roll over to a self-directed IRA. A rollover of your company-sponsored retirement plan assets directly to a self-directed IRA offers the advantages of continued tax deferral and a wider variety of investment options. Some advantages of this option:
A direct rollover avoids any immediate income tax and the 10 percent penalty, and there is no mandatory 20 percent withholding requirement as there is with an indirect rollover. Your savings continue to grow tax-deferred. You are able to choose from a wide range of investment choices not traditionally offered by employer-sponsored plans.
Note, though, that if a portion of your plan consists of your current employer’s stock and that stock has appreciated substantially, a direct rollover may not be your most viable option.
You should also consider factors such as your age and need for investment income before making a decision. Consult your financial advisor and tax professional to be sure you understand all your options before determining which option is right for you.
Kenneth Meyers, Managing Director at the Grass Valley office of Robert W. Baird & Co., is a member of the Securities Investor Protection Corporation, and has 25 years of financial services industry experience. Meyers can be reached at 530-271-3000, 888-792-9244 or email@example.com.