Before you make any big decisions with an old retirement plan, here are a few things to consider.
Your retirement savings are important. After all, the money you save now is most likely what you will rely on in the future. This is why that old 401(k) or 403(b) from your prior job(s) shouldn’t be forgotten. When deciding whether to keep the funds where they are, transfer them into your current employer’s plan or roll the funds over into a self-directed IRA, ask yourself the following questions and don’t hesitate to ask your CPA or tax advisor for assistance.
1. What are my investment choices?
How important is investment choice for you? What do you want to invest in for retirement? Will those investments give you the risk/growth/reward you seek for your retirement funds?
Not all retirement plans provide the same investment options. 401(k)/403(b) investment options are limited to those chosen by the plan's administrator and, typically, most plans allow you to choose from a limited list of mutual funds. Some may include lower-cost custom funds or company stock that would not otherwise be available. Large employers might offer institutional class mutual fund shares that are less expensive than retail shares of the same mutual fund available elsewhere. Some employer-sponsored plans also offer a self-directed brokerage option that allows access to brokerage investment options through the plan.
Likewise, investment options through an individual retirement account (IRA) are dependent on what is offered by the custodian, but, again, typically a wide variety of mutual funds, exchange-traded funds, stocks, bonds and CDs are offered. However, self-directed IRAs allow for a much broader spectrum of investment choices including real estate, gold, commodities, futures, options and non-listed REITs. Make sure your retirement investment options match your retirement goals.
2. How much are fees and expenses?
How much is it going to cost you to keep your retirement funds in the current plan?
Every retirement account—an employer-sponsored plan, like a 401(k) or 403(b) plan, or an IRA—has costs. Typical costs may include administrative fees for maintaining the account, management expenses charged for the portfolio and/or each investment, transaction costs associated with trades and other account activity. Some 401(k) or 403(b) plans may charge annual or quarterly account record-keeping fees if you are no longer employed by the company. Compare that to IRAs where some providers offer an account with no maintenance fee or annual cost but may charge investment transaction charges for every buy/sell. Be sure to carefully examine all the various costs associated with each option—even a small difference in fees can have a big impact. Note: Effective January 1, 2021, Modiv will pay account custodial fees with Forge Trust for investors opening an SDIRA ($1,000 minimum investment required).
3. What services do I care about?
What add-on services do you wish the plan administrator or IRA custodian offered? Education? Advice? Financial planning?
Most employer-sponsored plans and IRA providers already offer online dashboards for you to stay in touch with your retirement assets. Many provide additional education and advice to help you plan and better manage your investments; this can vary from online educational libraries to fully managed accounts with a professional money manager. Other examples of services you may want to consider are those that ease trading, such as online click to buy or sell or “checkbook control” available through some self-directed IRAs. Make sure your plan satisfies your desire to trade (or have someone trade for you), your need for financial planning and helps you make informed and rational investing decisions.
4. When do I expect to need the money?
How long do you have until retirement? Will you need the funds as soon as you retire? Will you be forced to take retirement money even though you don’t need it?
Retirement money is meant for… retirement. As a general rule, you can start withdrawing from your 401(k), 403(b) or IRA without having to pay a penalty once you turn age 59 ½. Further, most 401(k), 403(b) and IRAs require you to take minimum distributions once you reach age 72 if your 70th birthday is/was January 1, 2020 or later. Note that if your 70th birthday fell before January 1, 2020 you are required to take minimum distributions at age 70½.
For traditional IRAs, you must withdraw your first required minimum distribution by April 1 of the year after you turn age 72. For most 401(k) and 403(b) plans, the deadline to take your first required minimum distribution is April 1 the year after you turn 72 OR the year you retire. If you plan to continue working after age 72, you might consider rolling over your old (prior employer) 401(k)/403(b) plan into your new employer's plan so that you can further delay (and thus continue tax-deferral) taking a withdraw. Note, Roth IRAs are not subject to the same required minimum distribution rules and do not require withdrawals until after the death of the owner. What if you need your funds before age 59½? If in the year after you turn 55, you are laid off, fired or quit, you are allowed to pull money out of your 401(k) or 403(b) plan without penalty. However, this exception applies only to a plan with your current employer. If this is your situation, you may want to consider rolling over that old 401(k) or 403(b) into your current employer’s plan. Note, there is no age 55 exemption with respect to IRAs; they have their own early distribution rules.
There is one more situation that would allow you to withdraw funds even earlier without penalty. If distributions are made as part of substantially equal periodic payments (SEPP) over your life expectancy (or life expectancies of you and your designated beneficiary), and payments are made over at least five years or until you are age 59 ½ (whichever comes last), then there is no penalty on the withdrawal. Thus, if you are 35 when beginning a SEPP, then the retirement funds are distributed each year in equal amounts until you reach age 59 ½; that’s spreading payments out over 24.5 years. If you are age 57 when beginning a SEPP, then you must take funds until age 62 (minimum five years). Once you begin a SEPP plan, you must stay in it for its duration (quitting is an option but brings penalties plus interest) and you won’t be able to alter the amount being withdrawn. Another drawback is that you will not be able to further contribute to the fund you are tapping. Note: if you are looking at this with respect to your 401(k) or 403(b) plan, SEPPs are not allowed if you are still currently employed by the employer that sponsored the plan. This means that if you want to take SEPP, then leave that 401(k) or 403(b) with your old employer (do not roll it over to a new employer) or roll it over into an IRA and take SEPP out of the IRA.
Lastly, what if you are over 72 but do not need the funds? You can continue to contribute to a Roth IRA, an employer-sponsored 401(k) as long as you are still working or simplified employee pension (SEP) IRA (if you do not own 5% or more of the company, then you are not required to take minimum distributions until you stop working there).
The timing of when you may need to access retirement funds may help you decide whether to leave your old plan where it is, transfer it to your new employer’s plan or roll it over to an IRA.
5. Is convenience important?
Having your retirement savings in one place could make it easier to track and manage your investments, evaluate fees and manage distributions in retirement—particularly if you have more than one old workplace retirement account. If you prefer to manage all your finances in one place, you might consider consolidating your savings in a new employer's retirement plan or an IRA.
It’s your choice
Everyone has different needs and circumstances. Regardless of your unique situation, make sure to consider costs, investment choices, service, convenience and other factors when determining what may be right for you. Be sure to consider all available options and the applicable fees before moving your retirement assets. Remember it is easy to accidentally run afoul of the many tax and plan rules, so be sure to consult a tax advisor for help with this important decision.
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The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.