As retirement approaches, many employees often contemplate the fate of their 401(k) plans, with rolling over these assets being the predominant choice. However, defined-contribution plan advisors have noted the advantages of allowing individuals to retain their assets within these plans upon retirement. A survey conducted by Pimco in 2021 revealed that 36% of retirement plan consultants and advisors actively recommend that retirees maintain their funds within their plans.
When evaluating whether to roll over your retirement funds or leave them in your current 401(k) plan, it is essential to consider several pivotal questions. These inquiries can guide you toward the decision that best fits your financial situation and retirement goals.
The foremost question to address is the quality of the 401(k) itself. The plan should be assessed based on three critical factors: the quality and diversity of the investment options available, the associated fees for those investments, and any administrative costs that the plan may impose on account holders. While resources like Morningstar can provide valuable ratings and insights on investment choices, some plans might include collective investment trusts that require more in-depth investigation.
If you are a relatively young retiree needing access to your funds before reaching the age of 59.5, remaining with your 401(k) could prove to be a more viable choice, even if the quality of the plan is subpar. This is because individuals with a 401(k) who separate from their job can access their funds as early as age 55, avoiding the penalties that would apply to withdrawals from an IRA until age 59.5. However, it’s crucial to analyze your long-term financial sustainability before making early withdrawals.
Another significant factor to consider is whether the plan offers flexibility in terms of withdrawals. Some plans may restrict retirees from selectively choosing investments for their withdrawals, instead mandating that distributions be taken from all holdings proportionately. This restriction can be a significant drawback for those wishing to manage their asset allocations effectively. Furthermore, if both traditional and Roth accounts are part of the plan, retirees might not have the option to withdraw from a specific type, as distributions could also be required to follow pro-rata rules across both account types.
Moreover, creditor protection is a crucial element in deciding whether to maintain your funds within a 401(k). While laws governing the protection of retirement assets can differ by state, assets within a company-sponsored retirement plan generally enjoy stronger protections against creditors and legal actions than those held in an IRA. This consideration becomes particularly relevant for individuals with past credit issues or professions at higher risk of lawsuits.
In summary, whether to stay with your existing 401(k) or roll over your retirement funds requires careful consideration of the plan’s quality, your withdrawal needs, flexibility of account management, and available protections against creditors. By weighing these factors, you can choose the option that best aligns with your retirement strategy and financial well-being.
