By Nancy A. Hartsock
Financial Advisor and Financial Planning Specialist
The Hasenberg Hartsock Group at Morgan Stanley Smith Barney
The current economic and market environment has prompted many Americans to rethink their retirement strategies. If you are experiencing a job transition—particularly if the transition is unplanned and unexpected—such a reassessment may be particularly important for you. While it may be tempting to focus more on your immediate needs, you should not lose sight of long-term goals, especially your retirement strategy.
Some Basic Decisions
Your employer-sponsored retirement plan is likely to be a key component of your retirement strategy. Because it represents a key source of future retirement income, it is important to carefully consider your alternatives for administering these assets. During a job transition, you will usually have three options: take a lump-sum distribution, leave your assets in the employer-sponsored plan or move your assets into a Rollover IRA. Consider the options carefully.
Take a lump-sum distribution – Should you choose this option, the assets in your plan will be distributed directly to you in a lump sum, which provides you with immediate access to your funds. Depending on your short-term needs, that may appear to be an attractive alternative. However, a distribution will likely result in substantial federal and state income taxes and a 10% IRS penalty tax, which can significantly reduce the amount of the distribution. Because you will be receiving the distribution directly, the plan administrator must withhold up to 20% of the value of the distribution for federal income tax purposes. Moreover, you will lose the benefit of the tax-deferred status of these assets, which could reduce the amount ultimately available to you at retirement.
Leave your assets in the employer-sponsored plan – You can decide to do nothing, leaving your assets in your former employer’s plan. That will protect the tax-deferred status of your assets and allow you to transfer the account assets at a later time to a new employer’s retirement plan that accepts rollovers. But you may be limiting your investment choices and control because employer plans typically have a restricted investment menu and require the consent of your spouse before you can name someone else as a beneficiary.
Move your assets into a Rollover IRA – A Rollover IRA simultaneously addresses the issues of taxation, flexibility and control, and may hold significant benefits for you as a result.
- If your distribution is transferred directly to a custodian, rather than to you, the Rollover IRA eliminates the withholding requirement and penalties that may result from a lump-sum distribution.
- The entire rollover amount can be invested immediately, according to the strategy you specify.
- Your assets and any earnings continue to have the potential to grow tax-deferred until you retire and begin taking withdrawals.
- You may gain access to a wider range of investment options and more retirement planning and distribution flexibility.
- You can name any beneficiary, including a trust, without needing the consent of your spouse (although special rules may apply in community property states).
For example, investment products in an employer plan are usually limited to mutual funds and company stock. With a self-directed Rollover IRA, you can work with your financial professional to structure a portfolio using stocks, bonds, annuities and other investments utilizing an asset allocation that is customized to help you meet your retirement investment objectives. And your retirement strategy can be further tailored with a wider range of beneficiary selection and distribution choices.
Consider Consolidation— This may also be an excellent time to deal with multiple IRAs you may have opened over the years, and with account balances you may have left in the plans of former employers. Together, these assets may represent a significant sum. There are good reasons to consider consolidating them all in a Rollover IRA:
- Comprehensive investment strategy—It can be difficult to maintain an effective investment strategy—one that accurately reflects your goals, timing and risk tolerance—when assets are spread among multiple financial institutions. When you consolidate, your financial professional can help you ensure that these assets are part of an overall asset allocation strategy that is reflective of your current financial situation and long-term retirement goals.
- Greater investment flexibility—A self-directed IRA generally offers you the ability to choose from a wide range of investment products, including stocks, bonds, mutual funds, annuities and more.
- Simplified tracking—It is easier to monitor your progress and investment results when all your retirement savings are in one place, because you will receive one statement instead of several. That simplifies your life while protecting the environment.
- Lower costs—Reducing the number of accounts may also reduce your account fees and other investment-related charges.
The Bottom Line
Dealing with one account rather than several also simplifies the distribution process—including complying with complex minimum distribution rules when you reach age 70½. You also avoid the risk of losing track of your retirement accounts or access to the account assets should your former employer merge with another company or go out of business. Your financial professional can help you assess your alternatives so you can make decisions based on what’s best for you. You may find that this time of transition holds benefits for your retirement assets.
About Nancy Hartsock
Nancy is a financial advisor and financial planning specialist with The Hasenberg Hartsock Group at Morgan Stanley Smith Barney in Washington, DC. She specializes in wealth management, financial planning and multigenerational family work, helping clients reach their wealth goals through hard work and a common-sense approach to successful investing.
Prior to her career as a financial advisor, Nancy worked for 25 years in the health care industry, with the last 10 years in senior management as a business owner.
About Morgan Stanley Smith Barney LLC
Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.
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