Jones Wealth Management Group
901-312-9166 or 800-754-1218
401K Rollover
The Revenue Act of 1978 created the 401k plan. Prior to the passage of this law, pension plans were the most common retirement plan offered to American workers. Longer life expectancies have contributed to the shift from defined benefit plans to defined contribution plans such as 401k plans. With a 401k plan, the benefit (monthly income in retirement) isn’t known, but what is known or defined is how much is contributed to the plan such as a flat dollar amount (for example, $250 per pay period) or a percentage of pay (for example 10% of salary). The amount of monthly income in retirement is determined based upon the 401k balance at retirement.
At retirement, the most common options available for a 401k plan is leaving retirement assets in the former employer’s 401k plan, taking lump sum distribution of their retirement plan assets, or a 401k rollover to an IRA or Individual Retirement Account.
A financial institution serves as an IRA custodian or trustee. That financial institution can be a bank, credit union, mutual fund company, insurance company, or brokerage firm. An IRA is not an investment, but is a tax-deferred account. The actual investment or what it goes into depends upon what's offered by your IRA custodian.
If the custodian you choose for your 401k rollover is a bank or credit union, your 401k rollover options are often limited to a money market account or certificate of deposit (CD) offered by that bank or credit union. Moving your 401k into an IRA held at a bank or credit union results in your earnings being tied to prevailing interest rates offered at that time.
If you choose a mutual fund company to be the custodian for your 401k rollover, your IRA funds are invested in the offerings of that mutual fund company and can be invested in a diversified portfolio of stocks and/or bonds and your earnings would be determined by the performance of the funds in which your IRA is invested.
Insurance companies can also serve as a custodian for your 401k rollover. If your IRA custodian is an insurance company, your IRA funds are usually invested in a fixed, indexed, or variable annuity. An annuity is a contract between you and insurance company where the insurance company promises to pay you a certain amount of money on a periodic basis for a certain amount of time, including lifetime. For fixed annuities, your earnings are determined by the rate offered at the of your investment. For indexed annuities, the rate offered depends upon the performance of market indices. For variable annuities, the rate of return is determined by the performance of the subaccounts in which your funds are invested.
If your IRA custodian is a brokerage firm, your IRA funds can be invested in any combination of stocks, bonds, mutual funds, and other investments. The rate of return for your IRA invested at a brokerage firm would depend upon the performance of the investments selected.
The best company to rollover a 401k to an IRA or finding the best rollover IRA depends upon your individual risk tolerance, time horizon, and income needs. For certain individuals, 401k rollover options offered at a bank or credit union may be the best 401k rollover option, but for others, a brokerage firm may be the answer for what to do with a 401k at retirement.
The process of how to roll over a 401k to an IRA is generally the same regardless of whom you choose as the custodian. It entails completing an application to establish an account and subsequently contacting the 401k plan administrator and providing information about the new IRA that has been established to facilitate rolling over the 401k to an IRA.
Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of the FINRA website for additional information.
If you have additional questions about what to do with a 401k after retirement, how to roll over 401k to IRA, or moving a 401k into an IRA contact the Jones Wealth Management Group at 901-312-9166 or complete our contact form (click here) to schedule a no-cost consultation to discuss which option best suits your individual situation or to receive information about current rates.