727.441.9022
611 Druid Rd E • Suite 105 • Clearwater, FL 33756
92 TAMPA BAY MAGAZINE
WHAT TO DO WITH YOUR 401K?
| SEPTEMBER/OCTOBER 2016
V. Raymond Ferrara, CFP®
Chairman
Chief Executive Officer
Eric R. Ebbert, MBA, CFP®
President
Chief Operating Officer
When you leave an employer and move on to another, or
when you retire, there is always a question of what to do
with your 401k or other retirement plan.
You generally have four choices: 1) rollover to an IRA; 2)
stay with the former company plan (if allowed); 3) move to
your new employer plan (if permitted); or 4) take a lump
sum. Needless to say, each choice has its pluses and minuses
and you should consult with your financial and tax advisors
before making a final decision. There is no set formula,
nor rule of thumb. Every situation is different and needs
to be carefully analyzed. A financial advisor who does
not discuss in writing each of the alternatives’ positives/
negatives, including conflicts of interest, before making
a recommendation should be questioned and a second
opinion is likely in order.
What are some of the variables that must be considered?
To name a few, they include: 1) costs and fees; 2) possible
investment choices, or lack thereof; 3) services to be provided
by the financial advisor; 4) your age (especially if you are
over age 55 or 59 ½; 5) whether you will still be working or
will be retired; 6) potential creditor protection; 7) Required
Minimum Distribution (RMD) issues; 8) estate planning
considerations; 9) marital status; and, 10) the advisor.
Taking a lump sum is often rejected outright or discouraged
since you will likely have automatic withholding for income
taxes at a 20% rate. Some investors take a lump sum in order
to pay off debt, or worse, to buy something that they do not
really need, but these are practices to be avoided if at all
possible.
However, a good reason to use a lump sum strategy might
be to deal with highly appreciated company stock in the
401k plan in a more tax efficient manner. In taking a lump
sum of the stock, you will pay ordinary income tax only on
the original cost of the shares, but if you hold the shares
for one year or more after distributing them from the plan,
then the gain in the stock will be taxed at a capital gains rate
rather than ordinary income tax rates.
The decision between staying with the old plan or rolling
to the new employer’s plan is often one of simplification and
convenience. Why have multiple accounts unless there is a
compelling reason to do so? Be aware, however, that if you
are separated from service or retiring and age 55 or older, you
can take money from your 401k without incurring the 10%
penalty that is usually associated with taking distributions
prior to age 59 ½.
The advantages of an IRA rollover can include: 1) greater
variety of investment choices; 2) use of a stretch IRA at
death for estate planning purposes which is not available
in a 401k; 3) consolidation of funds for ease of management;
4) greater flexibility in taking RMDs; 5) tax efficient use of
funds for charitable donations; and, 6) potentially simplified
estate planning.
The negatives to the rollover include: 1) potential for
higher fees/commissions; 2) potential inappropriate
products being utilized by an advisor who is not acting as
a fiduciary (someone who must act in your best interest);
and 3) potential lack of creditor protection depending on the
state in which you live (not an issue in Florida).
If you find yourself facing this type of a decision, why
not give us a call for a consultation from a fiduciary (one
required to put your interest first)?
About ProVise Management Group, LLC: ProVise is a financial planning and investment management firm registered with the Securities and Exchange Commission
(SEC) and has been in business since 1987. Our 12 professional advisors serve approximately 1030 clients in over 30 states. As of 3/31/16 we were managing approximately
$1.191 billion for our individual, corporate, not-for-profit, and 401k retirement plans. Please visit our website at: provise.com. Investment Advisory Services offered
through ProVise Management Group, LLC. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and
regulations are complex and are subject to change.
/provise.com