People who lose jobs or change jobs should resist the temptation to spend down their retirement savings, Wells Fargo Advisors says in a recent column.
Ed Cunningham, first vice president and investment officer with Wells Fargo Advisors in Boise, sent me the column. Business retirement plans make up a good portion of his practice.
“Displacement of so many employees during this economic cycle has brought this issue of what to do with your retirement plan assets to the forefront,” he said in an interview.
With a job loss or change often comes a decision about 401(k) or other retirement plans: whether to keep 401(k) funds with the former employer, roll them over to an Individual Retirement Account, or pay the taxes and cash out, Wells Fargo Advisors says in the column. Over time, many employees have accumulated substantial balances in these employer plans that are designed for tax-advantaged retirement savings.
Some employers offer the opportunity to maintain the retirement account at the company. By rolling over the funds to an IRA, the employee can maintain control, manage the funds as he or she wishes, and remain subject to IRA rules alone rather than the limited investment selection and perhaps restrictive distribution policies of the former employer, Wells Fargo Advisors says.
But while a person is permitted to take loans from the 401(k) plan, this is not possible in an IRA. And depending on the investments used to fund the IRA, charges and expenses could be higher or lower than those the employee would incur inside a 401(k) plan, Wells Fargo Advisors says.
At the employee’s direction, the employer can transfer the distribution directly to another qualified plan or to a rollover IRA. A rollover occurs when the employee withdraws cash or other assets from one eligible retirement plan and contributes all or part of it within 60 days to another eligible retirement plan. Under this option, Wells Fargo Advisors says, the employee would direct the plan administrator to make a direct and tax-free transfer of funds from the former employer’s plan to a rollover IRA at the financial institution of his or her choice. That way, the employee can maintain the tax-deferred status of the retirement account, consolidate retirement accounts for easier management, and benefit from increased investment flexibility, Wells Fargo Advisors says.
When the employee rolls over a retirement plan distribution, he or she generally does not have to pay tax on it until later, when taking cash withdrawals. By rolling over, the employee retains the potential of the funds to continue to grow tax-deferred.
Job changers should resist the temptation to spend down their retirement savings whether they are moving to a new job or plan a hiatus from work, Wells Fargo Advisors says. Failing to roll over means the employee not only pays tax on the amount received but also may, if younger than 59 _, be subject to an additional 10 percent penalty on the early distribution received. Sound financial planning dictates that you would draw on other funds first, leaving retirement plan spending as a last resort, Wells Fargo Advisors adds.
If someone is simply moving an IRA from one institution to another and does not plan to use the funds, he or she should consider making an IRA transfer rather than a rollover, Wells Fargo Advisors says. This is a simple direct transfer between IRAs and financial institutions, ideally to better manage and grow the retirement assets.
Cunningham’s Web site offers more information, much of it found under the Life Events and Financial Resources tabs.