As you gather documents to prepare to file your tax returns, 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 median amount of time that workers have been with their current employers in 2022 was 4.1 years. Moreover, the tenure for older workers ages 55 to 64 was 9.8 years, or three times higher it was for workers ages 25 to 34.
Frequent job changes often leave workers holding a variety of retirement accounts, including 401(k) plans with former employers and/or individual retirement accounts (IRAs), that individuals may forget about or ignore. However, when these accounts are not reviewed regularly, workers risk having a portfolio that is misaligned with their goals, lacking diversification and subject to rising fees and an overwhelming abundance of documentation and records to maintain. Instead, you should consider working with a financial advisor to help you review these plans regularly as a part of your overall retirement plan and determine which of the following options make the most sense for your unique needs and retirement savings objectives.
Option 1: Cash out the Account
Taking money out of an employer-sponsored retirement plan before you turn age 59½ 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) savings plan, you also lose the potential for investing gains.
Option 2: Leave Money in your Former Employers Plan, if Permissible
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.
Option 3: Rollover Assets to your New Employer’s Plan, if one is Available and a Rollover is Permissible
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.
Option 4: Rollover Assets to an Individual Retirement Account (IRA)
You may rollover 401(k) savings directly into a traditional IRA to consolidate your retirement accounts and yield a greater 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. 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.
Options 5: Convert Accounts
Qualifying account owners may convert a pre-tax contribution IRA to a tax-free withdrawal Roth IRA by doing a backdoor Roth IRA conversions. This strategy will result in tax liabilities at the time of the conversion but will allow you to ultimately enjoy tax-free withdrawals in retirement and the ability to pass tax-free growth to future generations.
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 is a retirement plan consultant in the Ft. Lauderdale, Fla., office of Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs, and a registered representative with Raymond James Financial Services. For more information, call (954) 712-8888 or email info@provweath.com.
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 + CPAs. 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 59½, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
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.
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Posted on May 10, 2023