If you're thinking about retiring or changing jobs, you have a major decision to make. For years, you have been accumulating assets for retirement by participating in your employer's 401-K, 403b, or other retirement plan.
Now that you're about to retire or leave your employer for a new career opportunity or perhaps for retirement, you have an important financial decision to make, possibly the second most important of your life next to buying a home.
What will you do with the assets in your retirement plan?
The wrong decision can have a profound effect on your future financial security, while the right one can go a long way toward providing you with the retirement you've been planning for yourself over a lifetime of work.
Fortunately, The Tomei Agency can help you weigh the alternatives available to you, so you can determine which might prove most appropriate, given your specific objectives, risk tolerance and other circumstances.
Alternative #1 - Leave your money in your employer's plan.
You may want to consider this option if you are satisfied witht he plan's investment options, past performance and service or if you need more time to review other options.
One advantage of this option is that you don't have to make an immediate decision. If you are satisfied with the plan's investment options, past performance and service, you might simply leave well enough alone, atleast for the immediate future.
Before deciding, however, examine the possibility of rolling over your plan assets to an IRA. An IRA may give you more flexibility including the following:
- A wider range of investment options than is available in the plan
- The ability to add new contributions over time - your current plan will not allow you to make additional contributions since you are no longer an employee
- More flexibility in changing investment options and making withdrawals - taxes and penalties may still apply
- Possibly greater flexibility in naming beneficiaries
- The ability to provider your beneficiary with estate planning options - with an IRA, your beneficiary may be able to extend your IRA over his or her lifetime and continue to accumulate assets on a tax-deferred basis.
Alternative #2 - Take Your Retirement Savings in a Lump Sum and Pay Taxes
You may want to consider this option if you:
- Need the money for current expenses
- Want to invest money for purposes other than retirement
- Want to pay the taxes now rather than later
Many people are surprised at how much they have accumulated in their retirement plan and are often tempted to spend at least part of their distribution. However, when cashing out your retirement plan, you can lose almost half of your balance to income taxes. Remember, this money has never been taxed, so when you take it out of the plan, you will pay taxes on all of it. In addition, if you are under age 59 1/2 and an exception does not apply, you will also pay a 10% federal tax penalty.
Taking a lump sum distribution can be very costly. In addition to the tax bill you will pay, you lose the benefit of tax-deferred rowth provided by IRAs and qualified retirement plans. The long-term impact of taking a distribution may significantly outweigh the short-term benefit of having the money today. Therefore, although there may be times in your life when you absolutely must hav ethe money, think carefully of the impact a lump sum distribution will have on your retirement savings plan.
Alternative #3 - Take Your Retirement Savings in a Check and Roll It to an IRA or Another Retirement Plan within 60 days
You may want to consider this option if you:
- Plan to reinvest only a portion of your eligible rollover distribution
- Need more time to consider your options
- Need short-term, temporary access to your retirement assets
After receiving your lump sum distribution, you must be careful how you complete the rollover. If you choose this option, be aware that the plan administrator is required to withhold 20% for federal income tax purposes. Therefore, if you do not replace the 20% withheld with money out-of-pocket, the 20% will be included in your income and subject to income tax. If you are under age 59 1/2 and if you do not replace this 20%, it may be subject to the 10% federal premature distribution penalty.
Alternative #4 - Directly Transfer your Retirement Savings to an IRA or Another Employer Retirement Plan
You may want to consider this option of you:
- Do not need the money immediately
- Want to avoid current taxes and penalties
- Want to consolidate your retirement assets
You can avoid current income taxes, the pentaly tax, and the mandatory withholding by directly transferring your money into an IRA or another employer's qualified retirement plan. A direct transfer will keep your savings on its tax-deferred course, since no taxes are due until you withdraw your money.
It's easy! All you have to do is instruct your company to directly transfer your retirement money to the financial institution where you established your IRA or to your new employer's retirement plan.
Alternative #6 - Rollover Some Assets to an IRA or Employer Retirement Plan and Take the Remainder in Cash
You may want to consider this option if you:
-Have a need for some money but want some of your moeny to continue to grow tax deferred
- Have some employer stock in your plan and want to take advantage of Net Unrealized Appreciation
The Next Step:
A major financial decision such as what to do with your retirement plan assets requires a thorough analysis of the options available to you and how they'll impact your finances.
The Tomei Agency can help you determine which options make the most sense for you, given your individual objectives and circumstances. We can also provide you with the alternatives you need to consider to reinvest plan proceeds in a wide variety of vehicles.
