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Would I leave my 401k with the company plan?

Apr 21, 2013 by Susan in  |  Flag
6 Answers  |  7 Followers
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5 votes

Hi Susan! I am a fan of simplifying your financial life as much as possible, so combining your three separate 401(k) plans may be a good opportunity for you. Many sponsored plans do not give much education and advice for participants, so having an advisor who can help you combine them into one account, review the fees, and set an appropriate asset allocation as you head toward retirement sounds like a good plan. Find an advisor you are comfortable with so you will have a 'go to' person for those financial questions that will come up as you move toward retirement. Having good chemistry may be more important than just running some numbers.

1 Comment   |  Flag   |  Apr 22, 2013 from River Hills, SC
Rich Winer

I agree with Pam. Also, you can probably hire a financial advisor to manage your retirement money and assist you with other areas of your financial planning for the less than what you are likely paying now in fees to your various 401K providers, yet getting no advice or professional guidance. Working with an advisor would likely save you money and provide you guidance and peace of mind.

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Flag |  Apr 22, 2013 near Woodland Hills, CA

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5 votes
Peter C. Karp Level 20

Susan,

If you are leaving the company and you keep your 401(k) account in the current plan you may be limiting your retirement plan options and investment allocation flexibility such as types of investments you have access to like individual stocks, bonds, ETFs, etc. When a company sponsors a qualified retirement plan it is governed by the plan documents along with ERISA rules and regulations, especially distribution options. You should check with your HR department to find out if you can leave your account with them even if you are no longer employed by them. If your account balance is less than $5,000 they may have a right to force you out of the plan. Some of the distribution options available to you when you separate from a company include 1) transferring the money to an Individual Retirement Rollover Account (IRRA) or 2) transferring your account to your new employer’s 401(k) account if the new employer plan allows. In both cases you would not be subject to early withdrawal penalties or taxes. If you decide to take a distribution in cash, you are subject to taxes and depending upon your age may be subject to early withdrawal penalties as well.

It is always wise to consult with an experienced financial advisor and tax consultant to determine the best option for your particular situation. If you would like to contact us for assistance you can call 415-345-8185 or email peter@karpcapital.com .

Disclosure: The posted information is for informational purposes only. This message does not constitute an offer to sell or a solicitation of an offer to buy any security. All opinions and estimates constitute Karp Capital's judgment as of the date of the report and are subject to change without notice. Accordingly, no representation or warranty, expressed or otherwise, is made to, and no reliance should be placed on, the fairness, accuracy, completeness or timeliness of the information contained herein. Securities offered through Financial Telesis Inc., member SIPC/FINRA. Financial Telesis Inc. and Karp Capital Management are not affiliated companies.

Comment   |  Flag   |  Apr 22, 2013 from San Francisco, CA

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4 votes
Rich Winer Level 20

Susan, The only time I would recommend leaving a 401K with a former employer is when your have serious concerns about being sued. In that case, qualified plans are better protected (i.e. O.J. Simpson, whose qualified retirement plan could not be touched). If that's not a concern, you should probably roll your 401K into an IRA. Doing so will provide you infinitely more investment options at a lower cost, perhaps no cost, Most 401K plans charge ongoing fees which don't necessarily provide you any benefit and limit your investment options to a small number of mutual funds. Even plans with more options can't compete with the number of options you'll have with an IRA, where you can invest in individual stocks and bonds, mutual funds, etc. Although I generally don't recommend it, you can even own real estate, collectibles and other alternative investments in an IRA. Please let me know if you additional questions.

2 Comments   |  Flag   |  Apr 21, 2013 from Woodland Hills, CA
Rich Winer

Oops, "collectables."

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Flag |  Apr 21, 2013 near Woodland Hills, CA
Susan

Thank you.

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Flag |  Apr 21, 2013

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3 votes

Hello Susan, Generally, from an portfolio construction point of view, it often more advantageous to roll your 401k to a self-directed IRA when you separate from your company. You have many more options from which to build a portfolio - which can increase your returns and reduce your risk over time. Additionally, many 401k plans are laden with fees which can reduce your return - but this situation is getting better as plan providers are becoming more competitive and transparent about their fees over time, and the public, (and regulators) are paying more attention to the fees being charged.

That being said - it can be helpful to remember that you can take withdrawals from a 401k plan without the normal 10% tax penalty as early as age 55 if you are separated or retired from the employer that sponsored that 401k. So - if you are laid off, disabled, or for some other reason choose to retire from active employment earlier than the IRA accessibility age of 59 and 1/25 - then this particular account may be a source of funds for you to use. If you roll those dollars in to an IRA - then you lose that flexibility and those funds cannot be accessed until age 59 and 1/2 without the 10% tax penalty for early withdrawals (barring the standard exceptions such as first time home purchase, etc).

Ultimately, I would suggest that you consult with your financial advisor and make this decision in the context of your entire plan, and not in a vacuum. In my career, I have run across a number of individuals who arbitrarily rolled 401k funds into an IRA - and then, at age 56 or 57, wished they had easier access to those funds. So, there are arguments on either side, and the particulars of your personal situation should be taken into account at the time of the decision.

Jon Castle http://www.WealthGuards.com

View all 5 Comments   |  Flag   |  Apr 21, 2013 from Jacksonville, FL
Jonathan N. Castle, MSFS, CFP®

Hi, Rich. Since this discussion is for general advice to the general public, as well as specific to Susan, for someone who is, say... age 53... it might be helpful go into the "rules and restrictions" of the three methods of implementing 72t distributions. And please expound on the penalties associated with failing to meet those specific requirements. I have found that most individuals in that situation would just rather keep the money in their 401k if they can build a good portfolio out of it than meet those insane 72t requirements - especially if their need presents itself in the form of a temporary layoff or a lump sum need. Also, there are many low-fee 401k plans, especially with larger employers, running on the Vanguard, Schwab, Fidelity, or Ameritrade platform, and the employers pick up many of the costs associated with those plans. A blanket statement of "quick - move your 401k to an IRA" is not always the best solution, as unwinding that decision can be a painful one if done too early.

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Flag |  Apr 22, 2013 near Jacksonville, FL
Rich Winer

Good points. In a forum such as this, I think it's better to provide options and recommendations, but leave the specifics (which, as you pointed out, can be quite complex) to a direct discussion between Susan and her financial advisor. I think every piece of advice and recommendation on this website should come with a disclaimer that states: "Do not follow any advice or recommendation without consulting your financial advisor." Going into too much detail in this forum can be overwhelming and not necessarily appropriate when not knowing much or anything about the individual who initially asked the question. While I could have gone into greater detail on the specifics of 72(t), I also could have mentioned and gone into detail on NUA and its potential benefits, but I don't know that Susan has company stock in her retirement plan any more than I knew what distribution options would be most appropriate. We now know that Susan is 60 and would not need 72(t). My intention in responding to your earlier post was merely to point out that 72(t) was an option not mentioned in your post, subject to certain rules and restrictions so detailed and important that they comprise an entire chapter in some of Ed Slott's great books on retirement distribution planning. 72(t) is not something to tackle without professional guidance. However if one works with a financial advisor, he or she should be able to help their client determine if it's a viable option and help the client avoid any penalties. Finally, while you may be correct about low-cost 401K plans, in all my years as a financial advisor, I've never seen a 401K plan that had anywhere near the number of investment options available in an IRA account at TD Ameritrade. Even the 401Ks from Vanguard and Fidelity were limited to mutual funds and only a small subset of the available funds on those platforms. And in regard to plans where the company picks up the costs, I don't think most are inclined to do so indefinitely for former employees. You are correct that there are many variables to consider and that it's impossible to determine the best, most appropriate option without an in-depth discussion and evaluation of all material facts and feelings.

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Flag |  Apr 22, 2013 near Woodland Hills, CA

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3 votes

Hi Susan, if your former employer's retirement plan included an option for you to hold company stock, there may be a special tax strategy for you to consider prior to the rollover. This tax treatment is called Net Unrealized Appreciation. In a nutshell, its the difference between the current value of the employer stock and the cost you paid for the shares. Be sure to discuss this with your tax or legal advisor if your employer plan contains any employer stock. (The information presented herein is for presentation purposes only and is not intended to provide personal investment advice.)

2 Comments   |  Flag   |  Apr 22, 2013 from Melville, NY
Susan

Thanks to everyone for this discussion. This has been very helpful and I believe that I need to seek a reputable financial adviser who can help me take the next steps.

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Flag |  Apr 22, 2013
Rich Winer

You are very welcome, Susan. The NUA tax strategy Salvatore alluded to could be beneficial if you own a previous employer's company stock in any of your 401K plans. If the value of your stock is $50,000 (for example) and you sold it inside your 401K plan or IRA and withdrew the proceeds, you would pay tax on the $50,000 withdrawal at your ordinary income tax rate. Were you to utilize the NUA strategy, you could remove the stock from your 401K, move it to a brokerage account, pay a short-term capital gains tax on the cost basis and pay tax on the gain, over and above your cost basis, at long-term gain rates when you sell the stock. Depending on your cost-basis and tax-bracket, this strategy can provide you substantial tax savings. While it may not be viable or appropriate for you, it's another option for people to consider when deciding what to do with money in a previous employer's 401K plan.

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Flag |  Apr 22, 2013 near Woodland Hills, CA

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0 votes

Susan, simply put, you have more options and more control in an individual IRA than inside a 401(k). Remember this is money intended for your golden years, so if you are going to invest in an IRA, you may want to seek financial advice, or be sure you educate yourself. You want to minimize risks so that your money can grow over time and be there when you need it. Seek advice from trusted friends, neighbors and co-workers to get a feel for how you want to proceed.

Comment   |  Flag   |  May 06, 2013 from Delray Beach, FL

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