Have you retired, lost your job, or changed to a new job? If so, what have you done with your retirement plan? Most people think there are only two choices with their retirement savings, but in reality, smart investors learn that there are actually six choices after a job change. Before you sign on the dotted line, make sure you evaluate ALL of your rollover options:
“Take control” rollover. One of the most common choices people make with their retirement plan is to rollover their money to an individual retirement account (IRA). By doing an IRA rollover, you take control of your retirement savings instead of leaving them in the hands of your former employer within the limited investment options. Keep in mind that you cannot touch your money until age 59 1/2, or you will be subject to an early distribution penalty of 10 percent.
LSD. Nine times out of 10, this is one rollover choice you should ignore, unless you’re holding a significant amount of appreciated employer stock and you want to take advantage of a little-known tax loophole. LSDs (lump sum distributions) may be fully taxable as income to you and potentially subject to early distribution penalties (unless you’re incorporating advanced tax planning with employer stock).
Leave it alone. Many people leave their 401(k) or retirement plan with their old employer for all the wrong reasons. The majority of the time, it makes little sense to leave your retirement plan alone unless you’ve severed employment at age 55 or older (age 50 or older for public safety workers). Unlike IRAs that carry a 10 percent penalty on monies withdrawn before age 59 1/2, 401(k)s allow penalty-free distributions at age 55 or later (again, age 50 or older for public safety workers).
Roll it to a new plan. For simplicity’s sake, some may choose to roll their old retirement plan to their new employer’s plan. While this option is easy, it may not be the best for you because of a lack of true diversification.
Convert it to a tax-free IRA. Tax rates are in the clearance bin. Take advantage of this limited opportunity and consider converting some or all of your retirement account to a tax-free Roth IRA. Tax rates are set to skyrocket in a matter of months, so lock in today’s low rates while you still can. You and your family never pay tax again on the Roth, and you are not forced to take distributions (RMDs) at age 70 1/2.
Convert it inside the plan. Under recently created legislation, many 401(k)s allow you to convert your traditional retirement plan into a Roth 401(k) and let it grow tax-free for decades. Whether you convert outside the plan or inside the plan, Roth IRA funds should be earmarked as the last money you should withdraw because of the tax-free growth.
Robert Russell is CEO & CIO of the Ohio-based Russell & Company, a private wealth management firm specializing in helping affluent individuals ages 45 and up create and preserve their wealth. He co-hosts a radio show, authors The Rob Report blog, and is a frequent contributor to FOX Business and CNBC.
Securities offered through Kalos Capital, Inc., Member FINRA, SIPC. Investment Advisory Services offered through Kalos Management, Inc., 3780 Mansell Rd. Suite 150, Alpharetta, GA 30022, (678) 356-1100. Russell & Company is not an affiliate or subsidiary of Kalos Capital, Inc. or Kalos Management, Inc.