Deciding what to do with retirement funds can be a tricky business. Whether you are changing jobs or it is time to make a decision on what to do with a maturing IRA, understanding your options is the best way to ensure you are making the right decision.
While the concept of a rollover may seem simple, there are several variables that can add complexity to your decision-making process. If you are changing jobs, should you (or can you) roll your 401k from the old job into the new job plan? If you are retiring, should you roll any, or all, of your existing 401k plan(s) into IRAs? When you take a new job, should you (or can you) roll your existing IRAs into your new employer’s 401k plan?
There are four primary questions to consider prior to making any rollover decision:
1. Do you want your money right now?
2. Do you want to continue to defer tax payments?
3. Do you want to pay a tax now and withdraw money tax-free later?
4. Do you want to have control of your investment decisions?
If you want to use retirement savings now, you will have to pay income tax and likely a penalty for early withdrawal. So, if you are changing jobs and decide you would rather cash out your 401k from your old employer rather than rolling it over to the new employee plan, you can do that. Just recognize that some penalties will apply to this decision. However, you are not required to rollover any existing 401k accounts to a new employer-managed 401k or into an IRA. In fact, you can simply choose to leave your money in the existing 401k.
In answer to the second question, you should understand that one of the primary benefits of a 401k is tax-deferred growth. Your investment will grow without a tax being applied; in other words, the money is not taxed until you begin making regular withdrawals. This is a significant benefit because the tax rates on investment income are typically higher than the tax rates on regular income. Money withdrawn in regular intervals from a 401k after retirement will be taxed as regular income and not as investment income.
The next question to consider is whether or not you want to be taxed now and have tax-free money later. The answer? You may want to consider a Roth IRA since contributions are made with after tax funds. If you want to roll an existing 401k over to a Roth IRA, you will have to pay a one-time tax on the amount being rolled over; however, after that, the Roth IRA will grow tax-free and distributions taken after retirement age will not be subject to income tax withholding. There are some income restrictions involved in obtaining a Roth IRA, but if you are interested in having tax-free money after retirement, this is a good option to pursue.
The final question to consider is whether or not you want to control your investment. In many 401k, pension, or other employer plans, the employer controls the investment. For example, if you work for a large corporation, its pension plan may be 100% invested in the stock of that corporation. After you leave that corporation, you may decide that investment strategy is too risky. So, rolling that pension plan over to an IRA will give you the opportunity to diversify the investment to better suit your risk structure.
Whatever answer you give to the questions above, there is a retirement plan that is right for you. At Gulf Coast Educators FCU, we have financial advisors available to help you make the best decision for your particular circumstance. Click here to learn more about the IRAs, Roth IRAs and other retirement programs available at GCEFCU. If you prefer, you can call us at 281-487-9333, or stop by one of our branches for more information or a free consultation today.