Financial Planning Retirement

Stay or Rollover: A retirement dilemma

Now that you have wrapped up your last day at work, packed up your desk plant and family photos, and passed out the hugs to your coworkers, it’s time to walk away. Now you must live out the dream you have always had – retirement – and since your employer has generously matched your 401k funds, you will do so with confidence.

Unfortunately, this is also the day those contributions stop and you have to make the decision about what nest your golden egg will best be held in. Should you stay in your 401k or rollover to an IRA?

The first big question is “How old are you?” There are withdrawal penalties for those under 55 when it comes to 401k accounts and if you choose to go with an IRA, well then you better be at least 591/2 or you could be subject to both withdrawal fees and income taxes on the withdrawals.1,2

The next question is, “Can you do better?” One of the many mistakes 401k participants will make is ignoring fees and costs within the plan. These “small” fees can definitely add up over time, sometimes taking a significant hit on your hard earned savings. In addition, even though there has been a shift for plans to offer lower-cost investment options, some plans continue to offer higher-cost funds, which can definitely restrict your savings outcomes.

Another question is, “Are you truly invested in your company’s stock?” Many times, a large portion of funds within 401k plans are invested in the company’s stock. This can be great when it comes to rolling over to an IRA because under what is known as Net Unrealized Appreciation (NUA), if you have your 401k invested in these stocks, you will end up paying taxes on only what you paid for the stock, not what the stock is worth. So if you paid $2000 and it’s now worth $17,000. Well, you lucked out and saved some money on taxes.

Unfortunately, as noted by Scott Hanson in Rollover Rethink, not all funds are really company stock. “Many 401(k) plans don’t enable an employee to purchase their stock; rather, the plans have a ‘fund’ that mimics the performance of the stock. It’s very important to verify that your plan provides actual company stock,” Scott says.1

“When was the last time you looked at your funds?” Leaving your 401k with your employer after you retire can sometimes distance you from the investment management and oversight you once had with the plan and your money. This is definitely something to consider as you will no longer be attending the annual Company 401k meeting.

Many plans are based on target date funds which essentially set you up as a more aggressive investor in your younger years and gradually move you to a more conservative category as you approach retirement. This goes right along with “can I do better,” and brings about the question of whether or not your 401k funds will perform the way you hope, and if they don’t, will you know?

Another downside to being out of the loop when it comes to your 401k is that the plan may change and you may not even know. Maybe your employer has changed the fund line-up, altering the associated fees. Christine Benz of Morningstar points out that, “Plans offered by small employers may be larded with extra administrative fees or high-cost funds, and their lineups may skimp on core asset classes such as international equity or fixed income.” In addition, uninformed participants who leave their job may not be aware of the penalties that come with a withdrawal vs a rollover.3

With all of this said, it is important to keep in mind that even if you do have a financial advisor, they can’t actively manage funds that are managed by someone else. So many advisors encourage clients to roll over their funds as it gives them and you greater control.

On the other side, if you are looking to leave things as is, there are always much worse places to leave your money than in an old 401k (i.e. Under your mattress). The discussion is a great one to have with a financial professional who really understands the ins and outs of both options. So, will you “stay” or “rollover?”


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1- Rollover rethink: 4 good reasons not to roll 401(k) fund into an IRA. Scott Hanson. CNBC. Oct 22, 2014 [1/5/17]

2- The pros and cons of rolling over a 401(k) to an IRA. Dan Moisand. MarketWatch. Jan 24, 2014 [1/5/17]

3- 401(k) Investors: Avoid These 20 Mistakes. Christine Benz. com. Feb 24, 2015 [1/6/17]

Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. BCJ FG 17-395

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