What Should You Do With That Old Retirement Plan?

August 18, 2016

One of the questions I get from time to time on our financial helpline is what someone should do with their retirement plan when they leave a job. They often end up simply leaving the plan there, but that’s not always the best choice. Let’s look at the options:

Leave the money there. This is typically allowed as long as you have at least $5k in the plan. If you’re retired, you may be able to take periodic withdrawals. It’s the simplest choice because it requires no action from you.

Some good reasons to leave the money there are because you want to have access to a unique investment in the plan or you’d like to pay a lower tax on the appreciation of any employer stock in the plan when you eventually withdraw it. Otherwise, you’re probably better off rolling into another retirement plan to consolidate your accounts and provide you with more investment options. You’ll also have to take a required minimum distribution from each 401(k) and 403(b) you have at age 70 1/2 (unless you’re still working there).

Take the money and run. You can have them send you a check for the balance. However, you’ll have to pay taxes (plus potentially a 10% penalty if you’re under age 55 or if you’re under age 59 ½ and you left your employer before the year you turned 55) on it. If it’s a large enough distribution, that money could also put you in a higher tax bracket.

Roll it over. If you don’t want to leave the money behind or send a big check to Uncle Sam, rolling it into a new retirement account allows you to continue postponing the taxes on it. An IRA generally gives you more investment options while rolling it into your employer’s plan can allow you to consolidate your retirement accounts and possibly give you the option of borrowing against it. If you change your mind, the money you roll into your employer’s plan can typically be rolled into an IRA and vice versa.

Turn it into guaranteed income. Some plans allow you to use your retirement plan balance to purchase an immediate income annuity at discounted rates (and hence you’d get higher payments) or even into a pension plan if you have one. This provides an income that you can’t outlive and avoids any early withdrawal penalties. The downside is that you generally give up the lump sum of money and should only be considered when you’re ready to retire.

Personally, I’d roll my 401(k) into my IRA if I were to leave Financial Finesse because I’d like to have more investment options. I also know people who prefer to keep things simple by rolling everything into their current employer’s plan. If you’re still not sure what to do, consider speaking to an unbiased financial professional.

Laughter Can Be Retirement Medicine

May 01, 2015

Earlier in the day, I had a conversation with a couple who were convinced that they didn’t have nearly enough money to retire any time soon and this was a very problematic issue for them.While she loved her job and said she planned to work until she’s the oldest employee ever at her company, he is absolutely miserable. Through a reorganization at his company, he now reports to a manager that he absolutely cannot stand and he said he feels like life is being slowly sucked out of him. The new boss, in his view, is an absolute megalomaniac who makes life miserable for everyone in their department. Nearly half of the staff has left for other opportunities within the last 6 months and the workload for those remaining is overwhelming to the point that he feels like his health is being compromised. Continue reading “Laughter Can Be Retirement Medicine”

What Would You Have Done For a Ticket to the World Series?

November 03, 2014

It’s always fun to sit back and watch others get caught up in a little friendly competition as they support their teams. Unfortunately, some people take their love of sports too far and this can have a drastic impact on their financial future. Take for instance a dedicated Royals fan who recently acknowledged in a post game “fan on the street” interview that he cashed in part of his retirement savings to purchase a ticket to the World Series. I am convinced that at the time of this interview, he probably wasn’t thinking his statement would get picked up by national media outlets and blogs. Perhaps the most embarrassing aspect of his professed fandom was his stated profession- financial advisor.

Most of America knows that prior to this season, the Kansas City Royals suffered a 29-year playoff drought, which left most Royals fans in a delirious state throughout the playoffs. But this financial advisor from the Kansas City area took his loyalty to insanity – he pulled nearly $1,000 from his IRA to get a ticket just four rows behind the Giants dugout. He checked to see if the withdrawal would trigger a penalty, which it would, and did it anyway. (Note: The IRS imposes a 10% penalty on IRA withdrawals prior to age 59 ½ plus these distributions are also subject to ordinary income taxes.)

The first thing many financial planners throughout the country likely thought was this guy must be nuts talking to the KC Star reporter and admitting this. It would be like Dr. Oz saying he eats a gallon of Dreyer’s ice cream in front of the TV every night. As a financial advisor, he should know better, and what’s that about him checking on it? Every qualified advisor helping folks with their investments should know the IRA withdrawal rules offhand – that’s basic stuff! And finally, financial planners tell clients to have 3 to 6 months of take home pay at hand for emergencies and unforeseen life events… like a Royals trip to the World Series. Apparently, some people just can’t eat their own cooking.

So why do seemingly smart people do stuff like this? One might be the sheer excitement of the playoff opportunity – “a once in a lifetime chance.” Psychological research says overspending usually happens in the face of emotional stress – good and bad.

Then there’s the desire to be seen as important and getting ahead. What financial advisor wouldn’t want to be seen four rows behind the dugout by friends or on TV? This guy got so excited by the idea, he let all his financial control gates down.

As retirement savers, we simply can’t afford to be like this guy, especially considering that only 1 in 5 Americans are confident in their ability to retire comfortably. Impulse buys and YOLO moments are a major concern, especially for those with one month or less of cash ready for emergencies. Retirement accounts, even small ones, aren’t to be taken lightly enough to raid for baseball tickets or our guilty pleasures…until we’re actually retired. Doing otherwise risks the fact we’ll never enjoy those ballgames in retirement but instead may have to sell hot dogs at the park to those that DID save enough to go.

Here is some good news for our financial advisor who could benefit from some long term planning. The IRS allows us up to 60 days to pay back the funds from an IRA withdrawal to avoid the 10% early withdrawal penalty. This would be considered a rollover and prevent the distribution from being taxable. Just be aware that this type of IRA to IRA rollover can only be performed once every 12 months.

Better yet, just avoid thinking of your IRA as an emergency fund in the first place. This will help you avoid future tax headaches and preserve your retirement savings and future growth potential. In the case of our determined Royals fan, avoiding early IRA withdrawals can also decrease the likelihood that your peers will question your financial savvy.

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