During your entire working career, it can be expected that you will change employers a few times before you ultimately find a place that feels like home. When you do decide to move on, it raises the question of what does one do with your retirement money at your now-former employer? We have alleviated some stress for you by breaking down the process of figuring out the appropriate financial route to take after departing from an employer.
Before you can land on the right decision for maneuvering your retirement plan, which is most likely a 401(k), you’ll need to know if you are permitted to leave it with your prior company? Some employers encourage you to move your money, while others promote for you to leave it behind; and a few older pension plans may require the funds to remain in the plan with select windows of opportunity to either turn on the income or move the funds.
Essentially you have four alternatives: leave it in the current plan, transfer to your new employer’s plan, roll it over to an IRA (Traditional and/or Roth), or cash it out.
Listed are the considerations that you will want to focus on with your 401(k) plan before deciding to leave it with your prior employer or move it.
Believe it or not, based upon the size of the plan and other factors, separate plans could have the same exact fund that you could invest in but offered in a different share class with lower expenses resulting in a higher net rate-of-return.
Another strategy to review while deciding where to house your retirement assets is transferring your current 401(k) balance to your new company 401(k) plan, if one exists.
NUA: if you have company-specific stock in your plan, you should consider the planning strategy of NUA (Net Unrealized Appreciation). This permits a participant to distribute the company’s specific stock to themselves directly and pay ordinary income tax on only the cost basis. Provided the stock is held for over a year, the gain is treated as long-term capital gain, which is currently taxed at a lower rate than ordinary income. Other factors need to be financially modeled out. Simply do not walk by this valuable opportunity until you fully explore if this is advantageous for you!
In terms of rolling over your 401(k) into an IRA, there are two flavors, Traditional and Roth.
Remember, retirement plans have three distinct tax benefits: tax-deduction on contributions, tax-deferral on investment gains, and tax-free withdrawals. The catch is you can only have two of the three in the same retirement plan.
Now that you have a more thorough understanding of both Traditional and Roth 401(k) plans and IRAs, here are some thoughts for you to consider with rolling funds into an IRA.
The final alternative to consider is to request a cash-out or take the money and run! Yes, you will first be responsible for any income tax liability. However, you could request the 401(k)-plan sponsor or provider send you a check while withholding income taxes. It is simple, but there are a couple of things to prepare yourself to address before you pack your bags.
We strongly suggest you seek professional guidance when making pivotal life-changing decisions with high stake consequences. At Wealth by Design, we specialize in helping people compare their alternatives during crucial financial moments such as managing their retirement assets and we collaborate with your other advisors in the process allowing you to make well-informed decisions rooted in financial facts. Reach out today for us to help you design your financial route on your road to retirement.
Authored by; Craig C. Bartlett, CFP®, CRPC®, CBEC® craig.bartlett@WBD.group