Here are some common questions we get asked when it comes to 401k plans. “These days many people have moved around, from job to job, ending up with multiple 401k plans. What should I do? Leave the 401k where it is, move it to my new employer, or simply covert it to an IRA and invest it elsewhere?”
When you have a 401k plan from a previous employer, your investment choices are usually limited. One option to consider is comparing the investment choices you have within your current plan with the investment choices you have in the previous plan or plans. You may find that the number of investment options between the plans gives you enough diversification to simply keep the money where it is and not change a thing. Another option is take the old 401k from your previous employer and roll it over to an IRA or Individual Retirement Account, with a different financial institution. In most cases this will open up many more investment options to you, and more options mean more opportunity for true diversification. As with any financial changes there are some things you need to consider before rolling over your 401k to an IRA.
With an IRA if you withdrawal money prior to age 59 ½ the IRS will impose a 10% penalty. With a 401k (and any ERISA-qualified employer established defined contribution plan), if you plan on retiring between the ages of 55 and 59 ½ you can pull money out of that 401k without paying the 10% IRS penalty.
Do you plan on working beyond the age of 70? You may want to consider not converting to an IRA. Believe it or not, working beyond age 70 is becoming more common these days for a variety of reasons. With a regular IRA, at 70 ½ you are forced to take required minimum distributions from your IRA regardless of whether you are working or not. You are also forced to pay taxes on those distributions. If you are working, you might be in a higher tax bracket, which will cause those required minimum distributions to be taxed higher.
With a 401k plan you don’t have to take required minimum distributions until age 70 ½ or when you retire; whichever is later.
There are many variables that need to be considered when doing 401k and IRA planning. With the retirement planning picture becoming more and more complex, now more than ever it is important for you to seek the advice of a professional investment advisor before making any retirement decisions. A little sound advice today could save a lot in the future!