About Letort Trust

LeTort Trust is an Independent Trust Company with a single focus of providing personalized financial solutions to individuals, businesses and institutions. As an Independent Trust Company, we are held to the highest standards of fiduciary accountability in the industry. Our clients depend on the prudence and expert guidance we provide through our customized wealth management and retirement plan services.

 

Stay in, roll over or cash out? What should you do with your 401(k) when you leave?

Leaving your current job? Planning on retiring soon? If you are like most folks, you will change employers over the years, on average, more than 10 times before reaching age 40*. In addition, since the first baby boomers reached age 65 in 2011, it was predicted that they will be turning 65 at a rate of about 8,000 per day until 2029. All of those life changes leave you with the question of “What do I do with my 401(k) money?”

In most cases, you have four choices for the future of your 401(k) funds:

1)     Keep your money in your current 401(k) plan (if permitted by your employer)

2)     Transfer your balance to your new employer’s plan (if changing jobs)

3)     Roll over your 401(k) funds into an IRA account

4)     Take the money out and pay any taxes and penalties for early withdrawal

According to two studies by Hewitt Associates, 45 percent of employees take a cash distribution from their 401(k) plan when they leave their jobs prior to retirement. For those happy with their 401(k) plan, 32 percent keep their money in their current plan and 23 percent rollover their accounts into an IRA or their new employer’s plan.

We know that taking a cash distribution has the worst impact on retirement. Using money from a 401(k) prior to retirement not only results in taxes and penalties, but you will also lose out on future growth of the money, which will significantly impact your retirement readiness.

According to a recent article in BIZRATE, Pam Hess, director of Hewitt Associates, stated many employees are better off leaving their money in a defined contribution plan — either their former 401(k) or their new one. “Generally, the benefits of leaving your retirement money within a defined contribution plan are superior to rolling them over to an IRA,” she says. “You have the purchasing power of the entire plan behind you rather than being out there on your own.”

Employees often enjoy greatly reduced administration or investment management fees in their 401(k) plan due to the size of the assets in the employer’s plan. Leaving the plan could mean giving up that benefit and paying higher fees. For those nearing retirement, there is an additional advantage to leaving your funds in a 401(k) — especially if you need to begin tapping your nest egg before age 59 1/2. If you leave employment at age 55 or older from the employer who sponsored the 401(k), you can begin penalty-free withdrawals from your 401(k) account as early as age 55. If you withdraw money from an IRA before age 59 1/2, you are subject to an early withdrawal penalty of 10%.

A good reason to be cautious about rolling over a 401(k) into a brokerage IRA is discussed in the article Retirees lose, Brokers win in 401(k) rollover boom. In many cases commission-based brokers and financial advisors are not acting as fiduciaries. They can be transaction-based and therefore, not held to the higher fiduciary standard required of a corporate trustee. In the article, a number of cases are highlighted where 401(k) assets were placed in risky, higher cost investments, creating a hardship for the individual approaching retirement age.

So before making that big change, consider all of the options available to you and if you still feel confused on which way to turn, give us a call. We can help you evaluate all of your 401(k) options and see which works best for you.

*US Labor Department Statistic