Having a clear plan in place can feel like following a rainbow to your pot of gold in retirement. If you have weathered the financial storms, you know what’s to follow if you have the support of a trustworthy team with your best interests at heart/mind.
Because pre-retirees have most of their retirement assets held in a 401(k) Plan, the next steps can have much weight in future fulfillment. The distribution of your 401k plan most commonly occurs when you step into retirement. However, with so many options for distribution, it may be easy to feel lost.
Are you feeling confused about the types of retirement accounts and strategies? Humanity Wealth is here to help! Let’s chat.
Allow us to attempt summarizing all there is to know about rolling over your 401(k) Plan. Of course, one option would be to connect with an experienced independent financial advisor in Newark, CA, that you resonate with.
What Your Retirement Distribution Options for Your 401k
Below are a few considerations for this task.
Understand Your Options
If you are preparing to retire and have a 401(k), you have several options on what to do with your account. If preferred, you can do nothing and keep it if permitted by the employer.
If you decide to move the 401k funds out of your company’s program, you have several options of what to invest in. These should be discussed one-on-one with your financial professional.
Concentrated Stock Positions
If you hold a large concentration of company stock within your 401(k), you may want to be more deliberate when considering how to approach your distributions options. This is another area where you may want to sit down with your financial professional and discuss the pros and cons of the stock position.
Steer Towards Direct Rollovers
Your 401(k) provider will likely have the non-taxable option to initiate a direct rollover or an indirect rollover. However, it is more streamlined when utilizing the direct rollover option. With indirect rollovers, the funds come to you, making it your responsibility to ensure the funds get dispersed within 60-days. If that does not happen, this could turn into a taxable event.
How Rolling Over Your 401(k) Impacts Preparing For Retirement
When preparing for retirement, it is essential to stick to a long-term plan.
Lower Fees, Expenses & Administrative Costs
Most custodians and investment companies that maintain IRAs have much lower fees, expenses, and administrative costs when compared to 401(k) Plans. On the flip side, your investment options may be limited in comparison to other options. The details depend on your plan provider.
Broader Investment Options
With a 401(k) Plan, the fund options may be limited. When it comes to an IRA, you are afforded to select from the entire investing universe (in most cases). This allows a retiree to be more diversified, select lower-cost funds, and get more specific about their asset allocation.
Ease Of Use
If your retirement funds are kept within the 401(k) Plan account type, rules and regulations are generally more strict when compared to IRAs.
Whether considering tax or estate planning, having retirement funds held within an IRA may simplify things. This could be applicable when rebalancing your account or taking a distribution, but it could also apply to your heirs if they were to inherit some of your retirement nest egg.
Note: Roth 401(k) funds require Required Minimum Distributions (RMDs), whereas Roth IRAs do not require them. Therefore, if your 401(k) Plan is made up of both pre-tax and Roth funds, it may be advantageous to roll these funds into a Roth and/or traditional IRA.
Rollover vs. Transfer – What’s The Difference?
When it comes to 401(k) Plans and other investment accounts, the terms “rollover” and “transfer” often get confused. We hope to clear up that confusion below:
- Rollover: moving funds from one type of account to a different kind of account at another institution
- Transfer: moving funds from a single type of account between two institutions
Therefore, an example of a rollover would be moving your old 401(k) Plan account into an IRA. An example of a transfer would be moving your IRA held at Firm ABC to Firm XYZ.
It’s also important to note that the IRS only allows one rollover in 12 months, whereas there are no limits on the number of transfers.
Understanding The Differences Between A Self-Directed IRA, Traditional IRA, & Annuity
When moving your 401(k) into a different account, there are many avenues, such as moving your 401(k) into a Self-Directed IRA, Traditional or Rollover IRA, or an Annuity.
Self-Directed IRA
This IRA is self-managed by you, the owner. Instead of having your IRA managed by a firm that invests the funds, you can direct all investment decisions through your custodian of choice.
There are ample ways to invest your IRA money.
Traditional IRA
This type of account can hold the more standard investment options: stocks, bonds, ETFs, mutual funds, etc.
This could be a Traditional IRA (pre-tax) or a Roth IRA (tax-free) account. In addition, this can still be self-managed if you’re more of a do-it-yourself investor (DIY) or the last obvious option: managed by your wealth manager.
Annuity
An annuity is very different from a Self-Directed IRA and a Traditional IRA. First and foremost, annuities are insurance products designed to produce income.
Annuities do share some of the same tax-advantaged benefits that IRAs have regarding retirement. However, it’s essential to do your research if considering an annuity. They do not make sense for everyone and typically have higher fees and expenses when compared to IRAs.
Retirement Guidance is Alive & Well at Humanity Wealth!
Affordable financial planning in the Bay area points to Humanity Wealth Advisors. Serving the greater San Francisco Bay area, my team of devoted investment advisors serves with heart and soul. We truly believe that planning for retirement is critically important for building a holistic, personalized financial plan.
Retirement planning can start as early or late as you need. However, waiting just adds to your to-do list. Let’s connect to learn about you and explore how we can help.
Are you preparing to retire? Let’s discuss crafting a plan based on your retirement goals and preferences!
All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Asset allocation does not ensure a profit or protect against a loss.
Humanity Wealth Advisors and LPL Financial do not provide legal advice or tax services. Please consult your legal advisor or tax advisor regarding your specific situation.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.
A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
Fixed and Variable annuities are suitable for long-term investing, such as retirement investing. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Guarantees are based on the claims-paying ability of the issuing company. Withdrawals made prior to age 59 ½ are subject to a 10% IRS penalty tax and surrender charges may apply. Variable annuities are subject to market risk and may lose value.
