As you gather documents to prepare to file your tax returns for 2018, it is a good time to review your retirement accounts, simplify them and ensure your investment strategy continues to meet your current and future needs and goals.
According to the Bureau of Labor Statistics, the average tenure of an employee at one employer’s place of business is five years. Moreover, individuals turning 50 in 2018 held an average of 12 different jobs since the age of 18. In many instances, this results in individuals having multiple retirement accounts, including 401(k) plans from former employers as well as individual retirement accounts (IRAs) that they set up on their own. Too often, these older plans are ignored as a part of the status quo, which can lead to a lack of portfolio diversification, misalignment with your needs and objectives, increased fees and an overwhelming abundance of needless documentation and records to maintain.
Instead, consider working with a financial advisor to help you review the following methods for streamlining your retirement planning and determine which option is suitable for your particular situation.
Taking money out of an employer-sponsored retirement plan before you turn age 59 ½ is costly. These distributions are considered taxable events subject to income taxes and an IRS penalty of 10 percent on the amount distributed to you*. In addition, when you take money out of a 401(k) retirement savings plan, you also lose investing potential.
If you like the investments offered in a former employer’s 401(k) plan and there are no fees for keeping your savings in that plan, simply leave it as it is. Your savings can continue to grow without incurring a taxable event. However, you should continue tracking your account to ensure that the investments you selected continue to meet your retirement time horizon.
This option keeps all of your investments together in one account, which is often easier to track and allows a larger sum of money to continue working for you.
You may roll over 401(k) savings directly into a traditional IRA to consolidate your retirement accounts and yield more variety of investment options. However, it is important to note that you will incur tax liabilities and potential termination fees if you fail to do a direct rollover and instead withdraw the money from one account and move it to another. Similarly, In addition, there are specific IRS rules that prevent individuals from making more than one IRA rollover in a 12-month period and other limitations that discourage rollovers between different types of IRA.
Under the new tax laws that went into effect on Jan. 1, 2018, it is easier than ever for qualifying individuals to reap the tax advantages of converting a pre-tax contribution IRA to a tax-free withdrawal Roth IRA. While these backdoor Roth IRAs conversions can result in a tax liability at the time of the conversion, there are strategies to mitigate the hit and allow your savings to grow tax-free for you to pass onto future generations free of income taxes or for you to withdrawal free of penalties after you turn 59 ½. Investors should consult with a tax advisor before deciding to do a retirement plan conversion.
As you clear out the cobwebs on your retirement accounts, it’s always a good idea to review the beneficiaries named on your retirement accounts, especially when considering that those designations supersede beneficiaries named in a will. It is likely that a change in life events, such as marriage, divorce, the death of a spouse or birth of a child, will trigger a decision to change the beneficiaries who you name to receive your assets. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets.
Retirement planning is an ongoing process that requires frequent reviews of estate plans and updates under the guidance of professional advisors to ensure the strategies you established yesterday continue to align with your goals today.
About the Author: Olga Ismail, AIF, is a retirement plan consultant with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors and Accountants, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email firstname.lastname@example.org.
Provenance Wealth Advisors (PWA), 515 E. Las Olas Blvd., Ft. Lauderdale, FL 33301 (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through Raymond James Financial Services, Inc., Member FINRA/SIPC. Raymond James is not affiliated with and does not endorse the opinions or services of Berkowitz Pollack Brant Advisors and Accountants.
PWA is not a registered broker/dealer and is independent of Raymond James Financial Services. Investment Advisory Services offered through Raymond James Financial Services Advisors, Inc., and Provenance Wealth Advisors.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of PWA and not necessarily those of Raymond James. You should discuss any tax or legal matters with the appropriate professional. The information contained in this report has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 ½, may be subject to a 10% federal tax penalty. Investments mentioned may not be suitable for all investors. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.
Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications.
*Raymond James does not provide legal or tax advice. Please speak with the appropriate professional.