Apr 10
2
Things to Know Before You Rollover Your 401k
If you have a balance in a 401k employer sponsored retirement savings plan from a previous employer or soon to be previous employer, chances are you have given some thought as to what to do with your 401k. You may have spoken to an investment advisor, registered representative from an investment firm or life insurance salesperson who is advising you do a 401k rollover. Maybe you are getting input from friends or relatives offering you “free investment advice” advising you to go one way or the other.
Do yourself a favor and put off making the decision to do a 401k rollover until you understand why or if you should proceed with a 401k rollover. This article will give you some insight to help you understand your 401k employer sponsored retirement plan. In another article, we will address different ways to rollover your 401k, tax consequences, the pro and cons of different types of IRA’s, Roth IRA’s, Stretch IRA’s, asset protection and ensuring that you do not out live you money. However, for now let us focus on getting to know what you have and how it is set up to work for you. Many people think that all 401k retirement savings plan are the same, you invest pre-tax dollars and the money grows tax deferred. Well that aspect stays the same through all 401k accounts, but that only scratches the surface.
To start with there are many different record keepers handling 401k plans to employers across America. You may have heard of some of the biggest like Fidelity, TIAA-CREF, CitiStreet, Hewitt, Merrill Lynch, Vanguard, MetLife Inc., Putnam, T. Rowe Price. These companies offer similar but different options in the 401k plans they set up, but even with the same record keeper, there are many different options available to the employer with whom they are setting the plan up. So in essence, every 401k employer sponsored retirement plan is different, with different options, based on what was negotiated with the different employers, there HR staff and the upper level management. In addition, all these different options affect you in different ways. So let’s go over a fairly simple process that will help you understand how your 401k options affect you.
Before you start get your 401k paperwork, we will be looking at the investment options in your 401k employer sponsored retirement savings plan.
The reality is with most 401k retirement savings plans the investment options are mediocre at best (see video). We recommend comparing the mutual funds offered in your plan with other mutual funds or savings options available to you outside of your 401k plan. These services are available through an investment advisor or registered representative in an investment company, or do it yourself by typing (rate mutual funds) in your Google search engine and choosing a mutual fund rating engine. Either way the odds are that you will find that the investment options available in most 401k retirement savings plans are not the best. In addition, it is important to note whether or not there are any available options to provide you with guarantees combined with potential growth to keep up or outpace inflation, this can be very important to those nearing or in retirement (see video).
Now that you have an idea of what investment options are available in your 401k retirement plan, you need to call the record keeper for your plan; they will be able to provide the following information.
It is important to know what withdraw options are available to you, this can differ depending on the conditions under which you left your employment, were you terminated, retired, ECT.. You may have available to you Full withdraw only, partial withdraw or even limits to the amount of withdraws available per year. This is important to know before attempting a 401k rollover especially if you are considering a partial 401k rollover.
If you have an outstanding loan through your 401k, you must find out how your 401k plan handles outstanding loans in a rollover. If a partial 401k rollover is available, you may want to leave a portion in your 401k plan until the loan is re-paid in order to avoid any tax ramifications, as you may be hit with the balance of the loan as earned income. If you are unemployed or with greatly reduced income this may not be a problem but at the very least look into it before jumping into a 401k rollover.
If you have company stock, in your 401k employer sponsored retirement savings plan, it is important to find out how that stock is treated, many plans will have restrictions on selling portions of the company stock while still in the plan. Once a 401k rollover is completed, you can sell that stock if you choose. Also very important to understand (net unrealized appreciation), knowing the tax pros and cons of your actions are very important in deciding to do a 401k rollover. (See video)
You want to find out what your 401k retirement savings plan offers in the way of beneficiary options especially non-spouse beneficiaries. Watch this video by Ed Slott on the Pension Protection Act. (See video).
By the time, you are done with the process you should have a much better idea of what you have in your employer sponsored 401k retirement savings plan, and I hope this information will help you in deciding whether you should go forward with a 401k rollover.
Please feel free to Contact Us if you have any questions or comments on this or any other topic on this web site.
Your Life Advisors
Dean Barwick / Manager (714) 244-0672