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The Surprises of Life
I love a good surprise. Bad surprises not so much… so let’s focus on the good ones. It’s nice to have something unexpected and enjoyable surprise us. Like you, I think of a few examples in my life: “popping the question” to my girlfriend now over 13 years ago (AND the surprise that she actually said YES! …simply amazing), hosting a huge surprise party for my wife (and she had no idea), or being told my first child was on the way! Ok, these are the big surprises in life, but I also enjoy receiving and sharing the smaller ones too.
A 401(k) Surprise
I recently had the chance to surprise a client during his portfolio review. He is nearing his planned retirement date and shared that he was not thrilled with the lack of investment options and marginal/poor performance of his retirement plan options. Unfortunately, this is a common problem with the vast majority of company 401(k) and 403(b)s. In discussing his company’s 401(k) plan, I shared that since he was over 59 ½ he had the ability (while still working) to rollover the majority of his 401(k) assets to a self-directed IRA. It is called an “In-Service Distribution” and is a NON-taxable event when done correctly. He was thrilled to have the opportunity to diversify his investments, select from most any investment choice (mutual funds, stocks, ETFs, Individual bonds) and have professional guidance in the process. I further explained that he would continue to receive his company’s 401(k) match and be allowed to continue to defer his annual maximum contribution. With a smile all he said was, “let’s get it done.”
In addition to rolling over your 401(k) to an IRA, there are other options. Here is a brief look at all your options. For additional information and what is suitable for your particular situation, please consult us.
1. - Leave money in your former employer's plan, if permitted
Pro: May like the investments offered in the plan and may not have a fee for leaving it in the plan. Not a taxable event.
2. Roll over the assets to your new employer's plan, if one is available and it is permitted.
Pro: Keeping it all together and larger sum of money working for you, not a taxable event
Con: Not all employer plans accept rollovers.
3. Rollover to an IRA
Pro: Likely more investment options, not a taxable event, consolidating accounts and locations
Con: usually fee involved, potential termination fees
4. Cash out the account
Con: A taxable event, loss of investing potential. Costly for young individuals under 59 ½; there is a penalty of 10% in addition to income taxes.
Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.
A few other possibilities
The opportunity for an in-service distribution also applies to most 403(b)’s, 457’s and some pensions.
Another plan of action is to use an in-service distribution to direct a portion into your Roth IRA. Although this would be a taxable event, it would allow you to place money in a Roth IRA to obtain tax free growth and tax free withdrawals during retirement, among several other benefits.
As well, if you happen to have after-tax contributions in your company’s retirement plan, if the plan allows, you may be able to convert those contributions to a Roth IRA.
Many high wage earners, based on their single tax filing ($112-127k in 2013) or married filing joint ($178-188k) are prevented from contributing to a Roth IRA. Regardless of your age or income level you may be able to contribute to a Roth account inside of your 401(k); check to see if you company’s retirement plan offers a ROTH 401(k) option.
If you would like a “checkup” of your current situation or for me to investigate if your plan allows the above options, please don’t hesitate to contact me.
To the surprises both big and small in life,
Luke Fields, CFP®
About Stewardship Cents
Stewardship Cents exists to Educate, Entertain and Enhance the financial wisdom of all who read it. Everyone needs to be wise with what has been entrusted to them and common sense can help us be good stewards of all that we have. Stewardship is a belief of responsible overseeing and protecting of important resources. Luke Fields is Vice President of Foley & Foley Wealth Strategies, An Independent Firm, that has been based in Worthington, Ohio since 1981. A graduate from The Max M. Fisher College of Business at The Ohio State University, Luke is a CERTIFIED FINANCIAL PLANNER™, holding his Series 7, 66 and Ohio Life, Health and Variable Annuity Insurance licenses. He resides in Columbus, OH with his high school sweetheart, Beth and their three children. Luke is an active member of his church, serving in leadership and finances.
Follow additional insights and connect on LinkedIn, Facebook, his blog or Twitter. You can always reach him with comments or questions at: luke.fields@raymondjames.com.
Securities offered through Raymond James Financial Services, Inc. Member FINRA/SIPC
Roth 401(k) plans are long-term retirement savings vehicles. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72 (70 ½ if you reach 70 ½ before January 1, 2020).
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.