Research shows the average American employee switches jobs 11 times before retiring. Job changes mean many Americans have old 401(k) plans that may not be allocated properly to help to prepare them for retirement.
Every time you change jobs, you need to make some choices about what to do with your old 401(k) so that it keeps up with your financial needs. Generally, you have four basic options with any 401(k):
• You can leave the assets in the old employer’s plan (if the plan permits it).
• You can roll the assets over into your new employer’s plan (if one is available and the plan permits it).
• You can roll the assets over into an Individual Retirement Account (IRA).
• You can take a cash distribution (and deal with the potential tax consequences).
Each of these options has some advantages and disadvantages to consider. In this special blog post, we’ll help you avoid common (and expensive) rollover mistakes and show you how you can use your 401(k) rollover as an opportunity to help your retirement preparations.
1. ROLL OVER YOUR 401(K) TO ACCESS MORE INVESTMENT CHOICES (THAT BENEFIT YOU)
Every investor is different and volatile markets make customized strategies important to achieving your financial objectives. Workplace retirement plans often offer limited investment options that may not be right for your financial situation. In contrast, IRAs can hold nearly any type of investment, giving you flexibility in your investment strategies. By rolling over your 401(k) savings into an IRA, you open up a universe of investment options that you can use to build an investment strategy that’s aligned with your long-term goals.
2. KEEP MORE OF WHAT YOU EARN BY SLASHING EXPENSES
401(k)s and other workplace retirement accounts come with administrative fees and expenses that may take a big bite out of your investment gains. IRAs have very simple fee structures that make it easy to know exactly what you’re paying for and why.
As independent financial professionals, we’re committed to being completely transparent about the costs and fees associated with any investment we recommend. We don’t have sales quotas and are not tied to proprietary investments. We work with each of our clients to find investments that are best suited to their needs and long-term goals.
3. DON’T BE TEMPTED TO CASH OUT!
When our clients come to us for guidance on rolling over a 401(k) or other workplace retirement plan, we generally recommend that they do a direct rollover that transfers their assets from their old plan directly to their IRA account. This process has the benefit of being simple and not reportable to the IRS.
However, you also have the option to liquidate your old plan and receive the money directly. While it can be tempting to see your savings as a quick source of cash, cashing out can be a big mistake that may cost you thousands in penalties and taxes as well as prohibit you from years of future growth.
If instead you decide to take a distribution from your old plan or you don’t roll the assets over within the 60-day window, you will trigger IRS reporting and potentially saddle yourself with a big tax bill. Taking a check from your old plan administrator will require an automatic 20% withholding tax and be reported to the IRS. If you delay moving the assets to your IRA account, you could miss your 60-day window and be forced to pay penalties and taxes on your entire distribution.
4. TAKE CONTROL OF YOUR FINANCIAL LIFE
One of the best arguments in favor of rolling over your old retirement plan is that it can help simplify your life. In our experience, investors tend to lose track of accounts that aren’t right in front of them. Life gets busy and failing to modify your investment strategies to make sure they keep up with your needs can undermine your long-term financial success. Putting your assets in one place can help ensure that your investment allocations are reviewed regularly and remain consistent with your financial goals. As an ex-employee dependent on the plan, you may not be able to make changes to your investments, preventing you from adjusting your allocations to fit your current circumstances and long-term goals.
Why Work with a Financial Professional?
Moving your assets to an IRA can allow you to build a completely customized financial strategy that puts you and your financial goals first. One of the benefits of working with a firm like ours is the comfort of knowing that you have a team of experts continuously monitoring your investments and keeping you on track.
Investments are just one piece of your overall financial picture. As professionals, we take every aspect of your financial life into consideration when building customized strategies for your retirement. To take one example, many investors fail to consider how taxes will affect their investment returns.
Research shows that taxes can weigh down your taxable portfolio’s return as much as 2% annually. By not taking taxes into consideration, a hypothetical $150,000 portfolio could lose nearly $500,000 to taxes over 30 years. Tax-efficient investing strategies can help you keep more of your gains and lower your taxes each year.
What Should You Do Next?
Whether you’re leaving your job to pursue other opportunities or are on the wrong side of the economic downturn, the transition can be a stressful experience. Discussing your situation with a financial professional who specializes in working with executives can help you relax and explore all your options.
John P. Chladek, MBA, CFP® is the President of Chladek Wealth Management, LLC, a fee-only financial advisor with a fresh approach to financial planning and investment management. Committed to busy professionals and entrepreneurs in Kansas City. For more information, visit http://www.chladekwealth.com.