If you’re approaching retirement, you may be wondering where to park the money that’s sitting in your employer’s 401(k) plan. Should you transfer the balance to an Individual Retirement Account (IRA) as soon as you retire? Should you take a lump-sum payment and reinvest the money elsewhere? Should you leave the entire balance in your employer’s plan? As with most financial decisions, this one is not one-size-fits-all. Before taking action, it’s wise to take a close look at your particular needs and circumstances, as well as the advantages and disadvantages of each investment option. Consider the following:
- Investment options in a 401(k) plan may be limited. Cafeteria-style 401(k) plans generally offer fewer investment options than IRAs and this, in turn, may impact long-term planning. For example, an IRA may provide the option of purchasing individual bonds instead of bond funds. With an individual bond, you may be able to get a fixed interest rate for more predictable income. On the other hand, if you don’t have the time or inclination to research investment options, you may want to leave your nest egg in a solid 401(k) plan. Employers often reduce the number of mutual funds in a 401(k) plan to a few high-quality, well-managed funds with low fees. In addition, limited funds mean less recordkeeping. For some folks, that’s a real advantage.
- Some investment options may not be available in an IRA. In general, IRAs provide more investment alternatives than company retirement plans. But some options — stock ownership plans, for example — may not be available outside your employer’s plan.
- IRA fees may be higher. Large companies are often able to negotiate discounted fees for their 401(k) participants. Leaving your money in an employer’s plan may cut down on investment costs and put more of your money to work.
- Consider your retirement age. With an IRA, you’ll incur a 10% penalty if you make withdrawals before turning age 59½. Qualified retirees can begin taking penalty-free withdrawals from a 401(k) plan at age 55. So if you’re planning to retire between those ages, you might want to leave your money in the employer plan.
- Beware the transfer. If you decide to move your money to an IRA, it’s generally best to have the money transferred directly to a new tax-deferred account. Unless the funds are quickly reinvested in a qualified retirement account, you could face significant tax consequences.
For guidance in making your retirement financial decisions, give us a call.
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