A 401(k) plan is one of the most common ways for an employee who works for a public company to save and invest for retirement.
The 401(k) was created with the passage of the Tax Reform Act of 1978. Prior to the creation of 401(k)s, defined benefit plans, known as pensions, were a common source of retirement income for many Americans.
In the past 40 years pension plans have been on the decline while 401(k) plans have continued to increase. This shift has left saving and preparing for retirement much more in the hands of the employee and less the responsibility of the employer.
Over the years, additional rules and plan options were added that now offer greater control and flexibility to 401(k) account owners.
If account owners feel they are limited with the choices offered in their 401(k) plans, a review of the plan documents should be done to see if a self-directed brokerage account is an option.
Normally, a standard 401(k) offers a list of approved choices a participant can direct their savings and investments into. Those options typically consist of large, medium, small, international stock and bond strategies as well as fixed income.
A self-directed brokerage account offers hundreds if not thousands of additional options. Those options could consist of buying individual stocks, bonds, exchange traded funds and additional mutual funds. Moving funds to this option would allow the account owner to further customize the account with the new choices.
In-service rollovers to an IRA plan are another often little-known strategy and should also be considered. Not all 401(k) plans off er a self-directed brokerage account option as part of the 401(k). Yet, an in-service rollover to an IRA plan could be an option. This option is most common if you are older than 59 ½ or if the 401(k) has changed from one company to another over the years, either due to job changes or the company changing the plan. The advantage of doing this type of rollover is investment options in an IRA off er additional options that normally are not available inside a 401(k) plan.
Those options could include insurance guarantees with annuities, alternative investments, absolute return strategies and professional money managers. The other major advantage of an inservice rollover to an IRA is the fact that the account owner has the option to make tax decisions.
For many people who feel their tax rates are likely to go up in the future, paying some or all of the taxes now may make sense. If the money is moved from a 401(k) to a traditional IRA, a Roth conversion analysis can then be done. The advantage to the Roth IRA account owner is all future qualified withdrawals are tax free*, including profits. Since taxes are usually one of the biggest impacts on retirement income needs, looking at the Roth conversion could be a great strategy. ✯
*To qualify for the tax-free and penalty-free withdrawal of earnings, a Roth IRA must be in place for at least 5 tax years, and the distribution must take place aft er age 59 ½ or due to death, disability, or first-time home purchase ($10,000 lifetime maximum).
Depending on state law, Roth IRA distributions may be subject to state taxes. For more information about The Retirement Guys, visit www.retirementguysradio.com.
Securities and Investment Advisory Services are off ered through NEXT Financial Group Inc., Member FINRA / SIPC. NEXT Financial Group, Inc. nor its representatives provide tax advice. Th e Retirement Guys are not an affiliate of NEXT Financial Group.
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