When you are working for a company, participating in its 401(k) plan with high contribution limits, tax deferred growth, upfront tax deductions, and a company match is a great way to save for retirement. But when you leave your company or decide to retire, you have a decision to make. What do you do with your 401(k)? There are basically four options. Cash it out, leave it with your present employer, move it to your new employer’s 401(k) plan, or roll it into an IRA. For many, rolling a 401(k) into an IRA could be the best option. The following are four reasons why.
1. More investment choices
Rather than being limited to the number of funds within an employers plan, rolling your 401k into an IRA gives you access to more than 15,000 mutual funds to choose from.
2. Avoid losing track of old 401(k)s
Between job changes, family obligations, or moving from one location to another, it’s easy to forget where old 401(k)s are held. The U.S. Department of Labor estimates each year 2.8 million workers fail to claim or rollover $155 billion in 401k retirement plan assets when they change jobs. When leaving an employer, rolling a 401k plan into an IRA allows you to consolidate all your investments into one account and track them more easily.
.3. Penalty free withdrawals
The IRS allows for penalty-free withdrawals from an IRA to pay college tuition for yourself, a spouse, children or grandchildren, or to pay health insurance premiums if you are unemployed, including COBRA premiums. You can also withdraw up to $10,000 penalty-free to put toward the purchase of a home. Distributions taken from a 401(k) to pay for such expenses before age 59 ½ incur a 10% penalty.
4. Simpler distribution rules
There is one set of IRS rules governing required minimum distributions for rollover IRA’s and another set of rules for 401k plans. If you have multiple IRA accounts, you can add up the value of all your IRAs and take the required distribution amount from any one of the accounts. If you have multiple 401(k) accounts, you must calculate the required distribution amount for each 401(k) separately and then withdraw the required amount from each account. The failure to take a distribution from a rollover IRA or 401k will result in a 50 percent penalty of the difference between the required minimum distribution and the amount you actually withdrew.
Whether you’re changing jobs or retiring, it’s important that you make the right decision regarding your old 401(k). In most cases, the best option is to roll the assets into an IRA. However, you may want to discuss your particular situation with your financial adviser before deciding what to do with the funds in your 401(k).
Martin Krikorian, is President of Capital Wealth Management, a “Fee-Only” registered investment adviser located at 9 Billerica Road, Chelmsford. To schedule a “free no-obligation” portfolio review call (978)-244-9254 or email info@capitalwealthmngt.com.