Are you recently retired and have a company-sponsored 401(k)? Then you may be asking yourself what you should do with the funds in that account. Well, luckily for you there are a few options available and no matter what there is a solution for anyone. But first, any time you deal with retirement accounts and financial matters, in general, you may want to seek out a fee-only financial planner for assistance.
In some instances, you may be better off leaving the 401(k) where it is and make your withdrawals from there. In many instances, this is indeed a good option and one that involves the least paperwork on your part. But it is extremely important to always move your 401(k) from previous employers to your current one to consolidate the accounts in one location. This not only makes tracking things easier but reduces the chance that you could overlook a smaller account or in some instances, even larger ones. We as people tend to forget about previous employment and the benefits we obtained while working there at times. But under no circumstance should you cash out a 401(k) plan when you leave a job, instead roll it over into the new account or open an individual retirement account (IRA).
Another factor that you should consider when deciding what to do with older 401(k) accounts is the plan itself. In larger companies, they tend to have a wide selection of funds to invest in and tend to have more options as well. This is key to remember, and that is not all 401(k) plans are created equally in for employees. Yes, at the same job they are the same, but from employer to employer, they can be vastly different in several ways. One is the options that the plan offers. Some offer a wide variety of funds to invest in that cover many different asset classes and will offer a good base for diversification in your retirement portfolio. But smaller plans may not have that diversification available to its participants.
A second thing that must be considered when deciding to move your retirement account is the fees that the 401(k)’s funds charge you. Again, larger plans have access to funds with lower fees as a rule due to the massive volumes that their employees contribute. In some instances, they may even have access to institutional shares that normally offer the lowest fees in the public industry. An average fund in a typical 401(k) plan may charge about 1.33%, and an institution share would be closer to 0.54%. But participants in the federal government’s Thrift Savings Plan enjoy the lowest fees at an average of 0.029%.
But the main drawback on leaving funds in a 401(k) may not be the selection of funds or the fees they charge but how they make the distributions from the account itself. Most larger plans will offer its retirees an option to take periodic withdrawals either monthly or quarterly. Smaller plans may be set up on a less frequent schedule or even force you to make a lump sum withdrawal that you can then roll into an IRA or an annuity. If you want the most flexibility on your withdrawals, the IRA rollover may be the best way for you to look at when it comes to withdrawals and making them on your schedule.
Another aspect of 401(k) accounts and the withdrawals are in the plan they take a percentage from each fund owned in the account regardless of its performance. If you have a mixture of funds and some are up, and others are down, it does not matter to the plan as they will take equally from each, which means that you are technically selling your winners, which is what you want to do, and also selling your losers, which is what you do not want to do. An IRA would allow you to select the funds you wish to sell allowing you to sell the funds that have appreciated and leaving the others that have not to either grow and appreciate or you can select another fund to replace them before being forced to sell for your required minimum distribution (RMD).
If you need assistance, to seek out a fee-only financial planner for assistance. And if you have any questions or comments, feel free to leave a comment here or contact me directly. And for my email newsletter, please fill out the form below.