Peter L. Klenk, Esq., J.D. LL.M. Tax
At one time IRAs and 401Ks were small parts of most people’s estates, but over the years I have seen IRAs and 401Ks grow in size and significance,often surpassing the value of real estate and life insurance. Even as the size of these qualified plans grow, I find that clients often overlookon this significant asset and employers offer little in the way of advice. This short memo is meant to serve as a quick review of one aspect of the 401K, what options exist if you change jobs or retire. If you have more questions or if you would like to know more about IRA and 401K estate-planning options, please contact me directly.
When changing jobs or retiring you have fouroptions with respect to your 401K. Which option to select will depend on your given, unique circumstances. Consider these options carefully and consult your investment advisor, CPA and attorney in deciding which option is best for you.
Option 1: If your 401K exceeds $5,000.00, your employer must allow you to remain in the existing 401K plan. You may feel comfortable with the 401K provider, having worked with them over many years and the cost of managing the 401K may be less than if you shift elsewhere. If you continue working after age 70-1/2 the 401K rules allow you to delay withdrawals that would be required if you shift the money into an IRA and there may also be more protection from bankruptcy. Leaving the 401K as it is may also keep you from being tempted to withdraw money… making it subject to income taxes.
Option 2: You can transfer your savings into your new employer’s 401K plan. This option should be reviewed closely with your financial advisor, as investment options and costs may differ between the plans. If you plan to work after age 70-1/2 this option may also allow you to delay withdrawals. The transfer need be done correctly, trustee-to-trustee. If your 401K money comes into your hands as an individual it can be considered a withdrawal… and be subject to income tax and potential early withdrawal penalties. Make sure you work closely with your advisor!
Option 3: You can roll the 401K assets into an existing IRA or a new, separate IRA. These options should be reviewed carefully with your advisor. Rolling the 401K into an existing IRA is administratively easier, as there is only one account and one statement, but a separate IRA allows you the option of later moving the IRA into your new employer’s 401K program. An IRA may allow you to invest the qualified plan money in ways not allowed by the existing 401K plan. Work closely with your financial advisor so the transfer is made properly without exposing the assets to income taxation.
Option 4: You may decide to withdrawsome or all of the 401K. The amount withdrawn is no longer tax-deferred and is subject to federal, state and local income taxes. These taxes may move you into a higher tax bracket. Your age may effect your decision. If you are under 59-1/2 the IRS imposes a 10% penalty for early withdrawal. Withdrawing money from your 401K should only be done after careful consideration with your financial advisor and CPA. You do end up having complete control over your money… but only what remains after paying all of those taxes!
Whatever your choice, feel free to contact me regarding the estate planning options surrounding your IRA or 401K. Whether you have an IRA or a 401K you have the right to name a beneficiary. Since 2006 all IRAs and 401K programs must allow you to name IRA Trusts as beneficiaries. An IRA Trust allows you to pass IRA or 401K funds for a person’s benefit (e.g. your child), defer tax recognition of those funds, while keeping control of the IRA out of the person’s hands (e.g. a spendthrift or young adult). These are huge advantages that many people fail to consider and most plan managers fail to point out. We draft hundreds of IRA trusts each year and would be happy to explain them in more detail should you have questions.
