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Let's talk money.

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In our October newsletter we talked about the four options available to you for what to do with an old 401(k). We hope you found it helpful. This newsletter, since InvestEd is still running its promotion through November for those who have an old 401(k) and choose to roll it over with us, will discuss the reasons a person might want to consider rolling over an old 401k. We’ll touch on rolling over into an IRA, provided that you meet the appropriate criteria, the reasons why you should roll it over instead of keeping it where it’s at or rolling it into your current/new plan. Let’s begin!

First, let’s revisit the 4 options you have when working with an old 401(k).

1) Keep it where it’s at. For this, you do not need to take any action and can leave it with the provider.

2) Full distribution. Here you can take all the money out, but taxes and penalties WILL apply.

3) Roll it over into your new/current 401(k)/employer sponsored plan.

4) Roll it over into an IRA (individual retirement arrangement).

Let’s focus on #4 and really get into what the benefits to you are as an individual. One of the biggest benefits to rolling over an old 401(k) into an IRA is simply the access that you would have to YOUR money. In contrast to the IRA, if you needed to take money out of your 401(k), there are two things to keep in mind. 1) You will always have to take 20% out of taxes because they have a mandatory withholding clause. 2) You may only be able to do ALL the funds or none, so you have no control over how much you can pull out at a time. However, the early removal penalty would apply to both an IRA and 401(k). Accessibility and having control of the aspects of our investments is a big plus to having an IRA. Even if we do have to draw down on them (as a last resort hopefully!), it’s good to know what types of options we have in the first place.

So, you can see accessibility is one reason you may want to consider rolling over an old 401k into an IRA. Another factor you can consider for rolling over your 401k into an IRA is that you’d have much more control and say over what is happening within that IRA. If you want to do it yourself and move it to a discount broker and buy individual stocks or bonds, you CAN! Obviously, that comes with its own set of risk, but being in control and being able to make those types of decisions for yourself is empowering. This also opens up avenues to work with professionals and registered advisors, like InvestEd!, which can be great if you are looking for that type of relationship. That comes with its own set of obstacles though, which we’d love to discuss with you next.

The final point we’d like to make in the case of rolling over and old 401k is one of cost. One of the main points, which is extremely valid, that individuals will bring up to is that our fee (.95%) is higher than their old 401(k) plan, and for the most part that is TRUE. However, the mutual funds within your 401(k) do have an expense ratio, and it is a fee that you are being charged without noticing because it comes out of the Net Asset Value, or price of the fund, and it’s calculated on a daily basis. These expense ratios can be around .7 to over 1.0, which means you could be paying an equivalent value without the extra services and benefits of working with a fiduciary advisor. InvestEd works with clients in an expanded capacity, which would include things like: cash flow analysis, budgeting, debt repayment strategies, savings strategies, investment management, etc. This is where the edge starts to weigh in favor of working with an advisor to rollover your 401k vs. keeping it where it’s at in that old plan.

Ultimately, this decision is YOURS, and with the 401k content we’ll continue to share through this month, the hope is that you'll feel empowered to make an educated decision about what you do next. If you choose to work with us, that’s amazing and we would love to work with you, but if you feel that you have received the information to make investment decisions independent of an advisor, we support that too.

As a last note, we know that no situation is the same, so while we publish information here for all to use, we recommend you schedule a one on one to review your own personal situation. We can help by reviewing your CURRENT and OLD 401(k)s. The meeting/consultation is free and we hope you take advantage of it. Feel free to comment/respond here or email george@mdinvested.com for questions.

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