LinkedIn Answers' Question of the Week | Retirement and Estate Planning
As we roll out the LinkedIn Answers question of the week on the blog, lets stick to the theme of Personal Finances for this week as well. Heres a question that many professionals grapple with during their work life: What to do with a 401K at my old firm? And, more importantly, when I switch jobs are there any advantages/disadvantages to rolling it into an annuity? Read on to find the Best Answer to above question.
Question asked by | Matthew G. Sherman (Director of Marketing at Welsh amp; Katz)
Best Answer provided by | Michelle Ogden (Private Wealth Manager)
As a Retirement Plan Specialist I can tell you the majority of the time the Rollover IRA is going to be your best bet. As a Certified Financial Planner I can tell you that the Majority of the time an Annuity is NOT appropriate. I am not saying that it is NEVER appropriate, so all the Insurance Reps can back off on the hate mail, I just know the Majority of the time (like 99% is my guess, ha ha). I look at Company Retirement plans daily and it is true that your investment selection is significantly less, but also the fees to be in the plan are many times much higher than doing it on your own. However, on occasion I have seen some 401(k) plans that have GREAT investment options and very LOW fees and in those situations I suggest rolling into the company 401(k). Without knowing the details of your new 401k it is hard to say. The thing that is probably more important to know is that the rules for distribution from a 401(k) and IRA are NOT the same. I do not know what kind of money you are talking about here but if you have a sizable Rollover you may want to consider these differences in distribution rules. Each 401k plan is unique to the plan document. I would suggest you verify what is considered a hardship withdrawal from your plan adviser prior to making a decision. A Hardship withdrawal is defined as a financial hardship that is “immediate and heavy” where no other resources can be reasonably available to meet the need. Here are some examples:
1. Non-reimbursed Medical Bills - Provide copies of the medical bills and your insurance provider’s Explanation of Benefits statements (EOBs) showing the amounts covered and not covered by insurance.
2. Purchase of your principal residence: Attach copies of the contract and mortgage application.
3. Funeral expenses: Provide a copy of the bill showing that you are the responsible party and a statement indicating the amount of life insurance coverage carried by the deceased.
4. Tuition expenses: Attach a copy of the college or university’s bill showing the amount you owe for the next semester, quarter, or 12 month period.
5. Threat of foreclosure: Provide a copy of the notice you have received from your mortgage company or landlord regarding the implementation of eviction or foreclosure proceedings and evidence of the balance due.
Keep in mind Hardship withdrawals still incur the 10% Penalty and 20% withholding for Taxes. I had one participant that wanted to withdrawal 401k money for the transportation and hotel cost incurred to take her child to have medically necessary surgery in another state and those expenses didnt qualify for withdrawal.
NOW for the IRA distributions:
It’s your money, you take it out, you pay 10% penalty and taxes. PERIOD! Of course there are exceptions to the 10% Penalty such as Death, Disability, First Home Purchase up to 10K, Qualified Education Expenses, Medical Expenses in excess of 7.5% of Income, Substantially equal payments, Distributions used to pay Medical Insurance Premiums after separation from employment amp; after 12 consecutive weeks of unemployment compensation. I am sure there are others but these are the most common, consult your CPA.
Also if you plan to convert your IRA to a Roth in 2010 (regardless of household income) like I am suggesting to the majority of my clients, you will not be able to do that while it is in a Company 401k plan without terminating your employment.
I favor the IRA because of the accessibility in the event you need access to YOUR money. If you do not qualify for a Hardship as defined by your Employers Plan Document you can NOT get at YOUR money unless you quit your job.
AND unfortunately I am the one that has to tell that to 401(k) plan participants when they call in desperate need of their OWN MONEY.
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