Available options:

• Leave assets in a previous employer’s plan (if allowable).
• Roll over the assets or a portion of the assets into a Traditional IRA or a Roth IRA (if allowable).
• Move the assets into a new employer’s plan (if allowable).
• Liquidate or withdraw the funds.

Investors should consult with the plan administrator and a professional tax advisor before making any decisions regarding their retirement assets.

Leave assets in a previous employer’s plan

Not every plan allows employees who are leaving a firm to continue to participate in their current 401(k) plans. The sponsor is paying a service company to administer the plan, and the sponsor may not wish to incur the added expense. However, assuming this is an option for the separated employee, leaving the money where it is has advantages and disadvantages that should be carefully weighed.

Plan sponsors often hire service companies to operate and administer their retirement plans. Participants receive the benefits of self-directed investment management, investor education, record keeping and reporting, as well as trustee and custodial services. By continuing to participate in the plan, the departing employee may still receive these services, greatly reducing his investment expenses. Former employees, however, may be treated differently from active employees, even when they are allowed to remain in the plan. Additional fees, costs, and administrative expenses may be assessed.

Another advantage of remaining in the previous employer’s plan is that the investor has already made decisions about how much to invest and how assets should be allocated. Although additional contributions to the former plan are no longer allowed, the asset allocation has been determined relative to the investor’s profile and investment objectives. The investor may be best off simply continuing it, rather than having to sell and reallocate retirement assets.

Over time, though, the investor’s financial status and objectives may change, and he may have new requirements, especially if he has retired recently. Remaining in his former employer’s plan may no longer fit the investor’s current needs and the investor may want the assistance of investment advice from a Registered Representative. In this case, a rollover to an IRA may be the best solution. Investors holding significant employer stock that has appreciated in value may want to leave these assets in their former employer’s plan for tax reasons. This consideration must be weighed against the danger that the investor is over-concentrated in his former employer’s stock. Investors with these types of assets may need to consult a tax expert and their Registered Representative about their individual situations.

Some employer-sponsored plans allow former employees who reach age 55, or their beneficiaries, to take distributions without tax penalties (although they would still need to pay ordinary income taxes). IRA owners generally may not take penalty-free withdrawals until they reach 59 1/2. This may be an important consideration for investors in their fifties who want to retire early or may be uncertain about their future employment prospects. It may also be easier to borrow from an employer-sponsored retirement plan. Borrowing from an IRA is not allowed. A typical solution would be to transfer a portion of a 401k to an IRA while maintaining the old employer’s plan, if this is allowed.

Some plans may restrict how distributions may be taken. Often, the plan will not allow partial distributions and, therefore, the separated employee has no choice but to take the entire value of her account as a lump-sum distribution. This restriction could be problematic when the employee is nearing retirement and wishes to take limited distributions (or only the required minimum distributions). Withdrawing the entire balance in the account without rolling over to an IRA could impose additional tax burdens.

Roll over the assets or a portion of the assets into a Traditional IRA or a Roth IRA

When considering rolling over assets from an employer plan to an IRA, factors that should be considered and compared include:

• Fees & expenses
• Services offered
• Investment options
• When penalty-free withdrawals are available
• Treatment of employer stock
• When required minimum distributions may be required
• Protection of assets from creditors & legal judgments

Investors should consult with the plan administrator and a professional tax advisor before making any decisions regarding their retirement assets.

Transferring assets to an IRA is by far the most common answer to the question of what to do with 401(k) distributions. The benefit includes the ease with which assets can be transferred. This fast and easy method of moving the assets appeals to many investors, and they are more willing to accept the IRA transfer than to go through the extensive process of moving to a new 401(k). The assets that are transferred continue to maintain their tax-deferred status and are not taxed until withdrawals begin.

Two important factors when considering rolling retirement plan assets into an IRA include investment choices and fees. The plan administrator or sponsor of a 401(k) determines the universe of investments available to participants. Generally, they will consist of mutual funds with various objectives (i.e., growth, income, or preservation of capital).

With an IRA, however, the investor may have a much wider range of investments to choose from, such as individual stocks and bonds, fee based asset management, and third party asset managers. In an employer-sponsored retirement plan, fees and other expenses may be paid by the plan sponsor or indirectly charged to the investor. Once the client rolls the assets into an IRA, however, she is responsible for all investment fees and expenses.

Depending on the size of the rollover, these fees and expenses may be significant. For example, an investor who buys mutual funds may incur front-end loads as high as 5% or more. As investment balances increase, the fees may be reduced with the lowest fees applied to the largest balances. Fees may be hidden in offering documents and may not be readily apparent. Not only are there fees and charges for investing, but there may also be administrative fees and/or redemption charges as well.

Should you invest in a Traditional IRA or a Roth IRA? If the investor rolls his money from a traditional 401(k) plan into a traditional IRA, the funds retain their tax-deferred status. However, if he rolls it from a traditional 401(k) to a Roth IRA, he will probably incur an immediate tax liability. Since Roth IRAs are funded with nonqualified, i.e., after-tax dollars, a transfer to a Roth IRA must be included in the employee’s income, and the distribution will be taxed at his current marginal tax rate. Distributions from a Roth 401(k) may be rolled into a Roth IRA without immediate tax consequences.

Move the assets into a new employer’s plan

One of the main benefits of rolling the distribution into a new employer’s plan is that it remains tax-deferred. Since the transfer is from one qualified plan to another, there are no tax ramifications. The employee may continue to make tax-qualified contributions and may also enjoy the benefits of new employer matching contributions. Of course, the employee could also roll the distribution from the old plan into a Self Directed IRA or roll a portion of the old plan into the IRA and the remaining balance into the new plan when joining his new employer’s plan. In some circumstances, this strategy might be his best option.

When rolling assets from an existing 401(k) plan to a new employer’s plan, there are two ways in which the rollover can be accomplished. One method is a direct rollover and the other is an indirect rollover.

A direct rollover may be completed in one of two ways. The plan administrator either sends the funds directly to the new plan administrator physically or electronically, or a check is drawn by the administrator made payable to the new plan and given to the departing employee. In either case, the employee does not have constructive receipt of the funds and, therefore, cannot use the distribution for her own purposes. Also, there are no tax consequences.

With an indirect rollover, a check is made payable to the departing employee, not to the new plan. In this case, constructive receipt does exist and restrictions are placed on the employee. The employee now has 60 days from the date of the check to endorse it over to the new employer’s plan. Failure to do so would result in tax liabilities and possible penalties.

This type of indirect rollover may be subject to an IRS rule requiring a 20% withholding for tax purposes. For example, if an employee has $100,000 in the plan and is given an indirect rollover, he will receive $80,000. Within 60 days, however, he is required to roll the entire $100,000 into a new plan. Therefore, he would need to add funds from other sources to complete the rollover. He could then claim the $20,000 withholding on his next tax return, but the burden of coming up with the additional money falls directly on him.

There are other drawbacks to rolling over funds from the previous employer’s plan to the new employer’s plan. Many times, there are waiting periods or other restrictions for new employees. For example, an employee may need to wait a year before she is eligible to participate in the new plan, or the plan may accept quarterly enrollments only. If the departing employee is given a check for her balance as either a direct or indirect transfer, what does she do with the funds in the interim? If the period involved is greater than 60 days, the only sensible alternative from a tax perspective is to roll the assets into an IRA.

Another problem exists in that the new plan may have a complicated verification process before accepting rollover assets. The IRS publishes rules governing what plan sponsors and participants are required to do in order to maintain tax-qualified status. One provision requires that 401(k) plans may hold tax-qualified money only. Before a new employer plan will accept a rollover, assurance must be given that the rollover contains qualified deposits only. The new sponsor may request deposit verification from the previous sponsor, but there may be little incentive for the previous sponsor to take the time necessary for verification, since the participant is leaving. If the new sponsor does not receive the verified information, the sponsor may refuse to accept the rollover. Many sponsors are reluctant to accept rollovers and possibly lose the tax-qualified status of their entire plan.

Are you required to take the minimum distributions?

Employees who are 70 1/2 must begin taking required minimum withdrawals from their IRAs. However, employees who are still working are not usually required to take these withdrawals from their employer’s 401(k) plan when they reach this age. This may be a consideration for investors who plan to work past the age of 70.

Liquidate or withdraw the funds

The fourth option available to a separated employee is to take a lump-sum distribution from her 401(k) plan. In this case, the employee receives the proceeds from the plan and adds the amount to her current income for tax purposes.

If the account balance is relatively small, the investor may be willing to pay the taxes to use the net after-tax proceeds for her own purposes. However, if the balance in the 401(k) is substantial, the tax liability on the withdrawal could be quite high (as much as 39% to 50% of the balance), so the client should consider the other options available.

The investor’s age is an important factor to consider. Investors who have reached the age of 59 1/2 will not be subject to a 10% tax penalty, but will pay tax at their normal marginal tax rates.

The timing of the withdrawal might also be a consideration. For example, if an investor cashed out in January of 2017, the amount of the distribution would be added to his income in 2017, but any tax liability would not be due until April 15, 2018, a 15-month deferral.

Finally, always keep in mind that when you contact a service provider about a 401(k) distribution, you may think that you are receiving investment advice, but in fact, no advice is being offered. The firm may be offering investment education rather than investment advice. Investment education consists of offering general information about investing or types of plans and how to invest, but is not tailored to the individual’s needs. Investment advice, on the other hand, entails providing recommendations tailored to the needs of the individual client. You may then make an investment decision based on the recommendation.

Remember how hard you worked for your money; put an IHM Financial Registered Representative to work for you.