The decision to retire is full of choices. For instance,
- Where are you going to live?
- How will you spend your days?
- Where will you access the cash needed to support your lifestyle?
- And how do you invest the money you have saved in your employer’s retirement plan?
Your retirement plan assets (in this case a 401(k) or 403(b)), along with Social Security payments, are usually your largest support for covering living expenses. The treatment of these retirement assets can be critical to a “successful” retirement.
You have three choices available for your retirement plan:
- move the balance to an IRA (called a “rollover”),
- stay with the company plan, or
- take a lump-sum distribution of the funds.
The primary reason to move your money from a company plan is convenience. An employer’s retirement plan, almost by definition, is usually more cumbersome and bureaucratic than an individual retirement account (i.e. IRA).
Access to more investment options will be available in an IRA, you can usually access your funds faster, and IRAs can be aggregated for required minimum distributions (i.e. RMD) calculations. It is also usually easier to designate and change beneficiaries in an IRA.
If you are the recipient via inheritance of a retirement plan, an IRA’s distributions can be spread over your life (i.e., you do not have to pay taxes all at once). Though legal, a company plan administrator usually will not mess with what is called a “stretch” distribution. The aforementioned does not apply to a widow or widower as they can roll the plan balance directly into their IRA.
Stay with the Company Plan
You do not have to do anything with the money in the plan. It can stay right where it is. Sometimes, but not usually, a company plan has overall lower expenses than can be found elsewhere.
Distributions from a company plan carry a 10% tax penalty for those under 55. For an IRA, the minimum age to withdraw funds without a tax penalty is 59 ½.
Special tax benefits are available for company stock owned inside the retirement plan.
If you are no longer working for your employer, you can take your retirement plan as a lump-sum distribution. In addition to the aforementioned possible tax penalties, the distribution will usually be treated as income and thus subject to income tax. As the standard rule of thumb is “never pay tax until you have to”, this option is rarely advised.
Retirement is an exciting period of life. Major life changes await. How you fund those changes can be challenging. We can help with the tax and investment decisions. Let us take some of the stress out of what should be a joyous time. Please see Our Service Offerings
Source: Mastering Rollover Decisions, by Ed Slott