I lost my job — What should I do with my 401(k)?
Written by Nolan Baker Mark Clair | | letters@toledofreepress.comGrowing up, some aspects of my life have seemed like they came from the movie “Cocktail.” For those who haven’t seen the movie or don’t remember it, the movie is about two guys growing up and trying to take the world by storm. The journey shaped them by what happened to them, as well as the choices they made.
Instead of Tom Cruise behind the bar, it was my high school sweetheart Karen, and now my wife, working as a cocktail waitress a dozen years ago at the old Wyndham Hotel in Downtown that caught my eye. Lucky for me and like in the movie, she chose to marry me instead of a rich patron. I was a young investment professional then, and Karen left her job when we decided to have children and it was an easy decision to roll over her retirement account to an Individual Retirement Account (IRA) to allow me to manage it.
In Northwest Ohio, we have seen some of the largest unemployment rates in decades. For some, it’s by choice, while others have become victim to the recession. No matter the age, young or old, a choice needs to be made when someone loses a job: roll it over to an IRA or leave it in the current 401(k). Deciding what makes the most sense may be challenging, but the decision can be easier by understanding the options.
Those who own company stock should consider “net unrealized appreciation” before completing a rollover. This little-known and often forgotten strategy could save a fortune when it comes to paying taxes. Let’s say an investor purchased stock in his or her company in a 401(k) over the years and the price has appreciated nicely like in local companies from First Solar to Owens Illinois. An investor may be able to pay the lower 15 percent capital gains tax versus normal income taxes on this money by taking the distribution correctly.
Another special provision applies for those who are between the age of 55 and 59 1/2. Normally withdrawal from retirement accounts prior to the age of 59 1/2 can be taxed an additional 10 percent penalty by the IRS. Yet, some 401(k) plans allow terminated employees to take distributions from their plan after the age of 55 and avoid the 10 percent tax trap. An investor who is looking for income should consider this option.
My colleague Mark pointed out that new law changes often make a rollover more attractive than an IRA. In the past, anyone, besides a spouse, could be forced to take a lump sum distribution of a retirement plan, creating a tax as high as 50 percent upon death of an account owner. Recent changes allow beneficiaries, or those who inherit the account beyond a spouse, to stretch out taxes over their lifetime. This allows the account to continue to grow tax-deferred, while only taking a small required minimum distribution. And in December, under the Worker, Retiree and Employer Recover Act, the required distribution is even waived in 2009.
More choices are another great reason to consider a rollover to an IRA. Most 401(k) plans limit investors to only a handful of investment choices. Even if investors feel all of those choices are terrible, they are limited to the 401(k) plan documents. In a self-directed IRA, the investment choices become endless. In a self-directed IRA, an investor can purchase stocks, bonds, Federal Deposit Insurance Corporation-insured bank CD’s, annuities and more. These additional choices allow a plan to be customized to what meets an individual’s goals and risk levels.
The past is an important chapter in our lives, but the days of Karen working as a cocktail waitress are long gone. Today, we often have trouble staying awake just to watch Letterman’s opening jokes. When it comes to your life’s savings, sleeping on it and knowing your options before acting may be the perfect solution for a relaxing retirement.
For more information about today’s column and The Retirement Guys, tune in every Saturday at noon on 1230 WCWA and every Sunday at 11 a.m. on 1370 WSPD or visit www.retirementguysradio.com. Securities are offered through NEXT Financial Group Inc., Member FINRA / SIPC. The Retirement Guys are not an affiliate of NEXT Financial Group. The office is located at 1700 Woodlands Drive, Suite 100, Maumee, Ohio 43537.
