By:Adam Gellis
“I could use some extra money. Can I just take the cash from my 401(k)?”
Yes you can take the cash, but you will be hit with a 10% IRS penalty if you are under age 59½ and you will pay ordinary federal and state income tax on the value of the account. So if there is $20,000 in the 401(k) plan and you take an early distribution, you could end up with only $11,000 (assuming 10% early withdrawal penalty and 35% combined state and federal income taxes). That is quite a hefty cost to access this money that has been earmarked for your retirement, not to mention how difficult it can be to re-start your retirement savings plan.
“Can I leave the 401(k) right where it is and let it continue to grow?”
Oftentimes you can leave the 401(k) money in your old employer’s plan, especially if your account is over $5,000. Some employers will force ex-employees to move the smaller accounts out.
“If I can leave the money in my old employer’s plan, is that the best solution?”
It depends. Most 401(k) plans have limited investment options (5-20 different mutual funds or employer stock) and the quality of the investment options (fees, performance, diversification, etc.) vary with each plan. Many people, including me, decide that they can find more appropriate investments outside of their 401(k).
“Can I roll the old 401(k) into my new employer’s 401(k)?”
Oftentimes you can do this, but then you would be subject to the limited investment options of your new employer’s 401(k) program. If you like the investment choices in the new 401(k) program, this is a good idea. Otherwise you may want to consider a Rollover IRA.
“How does a Rollover IRA work?”
If you want more control over how to invest the former 401(k) balance, you can open up an IRA (Individual Retirement Account) at nearly any investment company. You pick the investment company that offers you the type of investments that are best for you. Your old employer will send you a check for the balance of the 401(k) program, but the check will not be made payable to you. It will be made payable to the investment company that you choose.
“Do I have to pay any taxes or fees for a Rollover IRA?”
As long as this rollover is executed as a “trustee-to-trustee transfer” you will not have to pay any taxes. The only fees you would pay would be whatever fees (if any) that your new investment company may charge you.
“How do I pick the best investment company for me?”
There are a variety of ways to do research for finding investment companies. Some people like to do their own research online, while others ask the advice of family and friends. In today’s world, where retirement savings is so important, many people are seeking the advice of a retirement specialist.
“What will a retirement specialist do for me?”
A retirement specialist will be able to help you determine the most appropriate mix of investments for your retirement planning and continually monitor the progress of both the investments you have made and your progress toward reaching your retirement goals.
“How much does a retirement specialist cost?”
Some retirement specialists charge a flat or hourly fee. Others receive a commission directly from the investment company that you choose so you don’t have to pay anything out of pocket. A quality retirement specialist should be very straightforward about how he/she gets paid and should be happy to explain this when you ask.
“How do I find a quality retirement specialist?”
You need to find someone that you are comfortable with and that you can trust. There are 3 main things you may want to look for:
(1) Someone who is independent can usually offer more objective advice than someone who is not independent. The best way to get objective advice is to get an independent opinion (Would you ask a Ford dealer who makes the best SUV?)
(2) Someone who has a dedication to investment advice and has signed an oath of ethics. The easiest way to find this is someone who is a Certified Financial Planner™ Professional and has the initials “CFP®” at the end of his/her name. You can look for a local Certified Financial Planner™ Professional at www.cfp.com/search
(3) You want someone who is young enough to still be working by the time you are planning to retire, so choose someone younger than you.
For more information, Adam can be reached at 561-776-5610 or Adam@MSCmail.biz
Adam Gellis, CFP® is an author, public speaker, and CERTIFIED FINANCIAL PLANNER ™ Professional in Palm Beach Gardens, FL. Adam’s office, Wealth Solutions, helps local professionals build and preserve their wealth.
Securities are provided through Mutual Service Corp, member NASD/SIPC. Advisory Services offered through Independent Financial Partners, a registered investment advisor. Wealth Solutions and Mutual Service Corp are separate companies. All information provided is based on current tax law. For all tax matters, consult with your tax advisor.
