Retirement Planning: Weighing the Pros and Cons of Rolling Over Your 401(k)
As retirement approaches, many employees face a crucial decision: what to do with their 401(k) plan. While rolling it over may seem like the obvious choice, it’s essential to consider the benefits of keeping your assets in the plan.
The Benefits of Staying Put
Defined-contribution plan advisors are well aware of the advantages of allowing employees to retain their assets in the plan after retirement. In fact, a 2021 Pimco survey found that 36% of firms actively encourage participants to stay put. By doing so, employees can benefit from lower costs and a more streamlined plan.
Evaluating Your 401(k) Plan
Before making a decision, it’s crucial to assess the quality of your 401(k) plan. Consider three key metrics: the quality and breadth of the investment lineup, investment fees, and administrative fees. You can use Morningstar ratings and data to evaluate investment options, although you may need to do some additional research if your plan includes collective investment trusts.
Accessing Your Funds Early
If you’re a young retiree, you may need early access to your funds. In this case, staying put in the 401(k) plan may be the most practical option, even if the plan isn’t ideal. This is because investors in 401(k) plans who have left their employers can tap their assets at age 55 without penalty, compared to age 59.5 for IRA investors. However, be sure to assess your portfolio’s long-run sustainability before contemplating early withdrawals.
Flexibility Over Withdrawals
Some plans may not offer flexibility over withdrawals, requiring retirees to take distributions pro rata from all holdings in the account. This lack of flexibility can be a significant disadvantage for retirees who want to maintain their asset allocations. Additionally, if the plan offers traditional and Roth options, participants may not be able to choose which account to pull from, with distributions coming out pro rata from both account types.
Creditor Protections
Legal protections are another essential consideration. Company retirement plan assets generally have better protections from creditors and lawsuits than IRA assets. This is particularly important for those who have had credit or bankruptcy problems or work in a profession with a high risk of being sued.
By carefully weighing these factors, you can make an informed decision about what to do with your 401(k) plan at retirement.
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