RockCrest Financial LLC

One of the things a first time boater quickly learns is that most of the time it’s off course. Constantly changing factors like wind, current, depth, and waves are always threatening to push or pull the boat in unintended directions. Unlike your car, which has breaks, a boat doesn’t! So, for a novice boater, it’s somewhat unnerving to realize that a boat at rest… simply doesn’t stay still!

I often think of retirement planning and investing as very similar to boating. There are many factors to consider when you take responsibility for steering your portfolio towards the ultimate goal of retirement. You portfolio is constantly subject to being thrown off course by the choice and allocation of investments, the direction of the economy and markets, and lack of time or expertise in monitoring and adjusting the portfolio. Life, like the ocean, is constantly changing. Similar to a boat on the water, a retirement plan or investment portfolio at rest simply doesn’t stay in the same place! Your life, health, goals and investments should be monitored periodically. As these things change, you may need to modify your financial plan and portfolio to stay on course.

My first experience as a boat owner was frustrating, if not downright terrible. I had problems launching, driving, maintaining and especially, docking it. Lack of defining my needs led me to buy the type of boat that wasn’t what I really wanted. The mistakes I made were expensive and took away from my enjoyment. To top it all off, about six weeks after buying it, the boat sunk at the dock following a hurricane!

Like my experience in boating, don’t jump into saving for retirement without planning carefully. Here are four tips on keeping your retirement plan and portfolio afloat:

1. Have an ultimate destination and map for getting to retirement. You may have to adjust the course, but making small changes is easier than being totally off course;
2. Know the investments that make up your portfolio and why they are there. Just like knowing the parts of your boat, you want to make sure your portfolio has the investments it needs to operate effectively.
3. Make adjustments as the economy, markets and your situation changes. The portfolio you create today will change as the conditions around you change and also as you get closer to retirement.
4. Consider hiring a captain. Hiring a professional who will help chart your course, monitor and keep things on track, make appropriate investments, and adjust the portfolio as conditions change is important if you don’t have the time or desire to take the ultimate responsibility yourself.

Although my first boating experience was terrible, it made me a smarter boater. The next year, I purchased a smaller boat and learned from some local experts about important boating issues. I learned how to launch it correctly, maintain it, fix small problems that came up, and use experts to do the hard stuff that I didn’t know how to do. The result was a better, less stressful and more enjoyable experience. After I gained experience, I traded up to a slightly larger boat and had many wonderful trips on the water with my family.

Most of the same lessons that are key to good boating can be applied to having good financial planning and investing experiences. Keep your retirement portfolio on track by charting a destination. Navigate it through good times and bad. Stay on course by increasing your knowledge and utilizing experts when needed. Cruising through retirement can be fun and enjoyable, but it still requires you to take on the responsibility of being a good captain of your own personal retirement plan.

      Have you recently retired or left a company? If so, one of the most important assets that you own may still be sitting at your old employer… your 401(k) or other employer sponsored retirement plan. For many people, this is one of the biggest assets they own outside of their home. If your retirement plan is currently at your old job, knowing your three most likely options, as well as some very important considerations, is one of the keys to keeping your retirement investment plan on track.

Maybe you didn’t actively manage your retirement account while you were making contributions at your old employer. After all, the average retirement plan participant probably spends more time seriously considering the choices on restaurant menus each year, compared to critically evaluating their investment account statements. Although that may be an exaggeration, unfortunately, it’s probably not too far from the truth. Even if you spent some time looking over your 401(k) when you worked for your previous employer, once separated from service, you may not have spent time lately doing a thorough review of the investments and performance of that account. In other words, “out of sight, out of mind,” as the saying goes. Yet, why would you treat one of your most important investment assets like that? Even if you don’t have a lot of money in that retirement account, why be foolish with your money at all?

Knowledge is power. Making smart decisions about a retirement plan held at your old employer means knowing your options. Evaluating those options in light of your own situation is paramount to proper retirement planning. You should consult with a qualified financial professional if you have any questions or need to evaluate your particular circumstances. If you have tax related questions, please consider seeking the help of a qualified accountant.

This article discusses three common options that are often available:

• Leaving your retirement account at your old employer;
• Transferring the account to a new employer;
• Rolling the account into a Rollover IRA.

Also, to simplify the article, we will refer to 401(k) retirement plans. However, the same generally holds true for many 403(b), 457, pension and other employer sponsored retirement accounts. Although the rules on these may differ from plan to plan, the point is that you should evaluate your options on your own or with the help of a qualified financial professional.

Leaving Your Retirement Plan at You Old Employer
This option is generally available if the account is over $5,000. Although this is the easiest option, it may not be the best. Can you get better and more flexible investment options outside of the plan? Is the retirement plan at risk in any way with your old employer? For many, rolling it over to their new company’s plan or making a direct rollover to an IRA are better options.

(Note: If under $5000, many employers will require you to either roll it into your new employer’s retirement plan, roll it into an IRA, or distribute it directly to you. If you are over the plan’s retirement age or at least age 62, your company may insist that you take a payout. Your previous employer may do this in order to decrease the plan’s administrative costs. Having the plan distribute it to you is generally the worst choice and has tax and potentially penalty consequences, especially if you are under age 59 ½.)

Transfer Funds to Your New Employer’s Plan
Your new employer’s retirement plan may accept rollovers from the previous employer’s plan. If you take this option, it should be done as a direct transfer in order to avoid paying current income taxes and the 20% mandatory withholding tax (discussed later). Sometimes, rolling over the plan from your old employer to a new one makes sense. However, you need to carefully look at the investment options and expenses of the new plan. Plans with a small number of investment options or those with little diversification or high fees could make the simplicity of consolidating your money at your current employer a bad investment decision.

IRA Rollover (Direct Rollover into an IRA)
A Rollover IRA is a tax-deferred account, very similar to your employer’s retirement plan, but often with much greater flexibility. When you leave your old employer, one of the easiest and flexible options for your retirement assets is to simply roll it over directly into a Rollover IRA (Individual Retirement Account). Not only do you avoid any mandatory state or federal withholding taxes; you also avoid a potential 10% IRS early withdrawal penalty that would occur if you take a direct distribution and are under age 59 ½. Once you have an IRA Rollover in place, you can use it in the future to consolidate tax-deferred retirement accounts from several old employers. Over time, it may be easier, more efficient, and even more cost-effective to manage most of your retirement assets “all in one place.”

Rollover IRAs may also give you much greater flexibility and control over your investments. Most employer sponsored retirement plans only have between 10 and 30 investment choices. A Rollover IRA can often expand those investment choices to hundreds or even thousands of options—all in one account! For example, you can choose a Rollover IRA provider that offers mutual funds from a variety of companies. You can even open a brokerage based Rollover IRA that will allow you to create a portfolio of individual mutual funds, stocks, bonds, commodity/managed futures related investments, real estate investments, etc. A Rollover IRA is a great option for someone who utilizes a fee-based financial planner or advisor experienced in managing investment assets, or for an individual that has the knowledge, experience, time and patience to choose investments wisely.

Important considerations

What if I already received a distribution check from my employer?
If you have already received a distribution check from your employer, they may have already withheld the 20% mandatory withholding. Although this situation is not optimal, you should know that you have 60 days from the date you received the payout to invest, or rollover, these funds into an IRA. However, and this is important, you need to somehow come up with the additional 20% that the IRS withheld and also deposit that into the Rollover IRA. When it comes time the next year to file your income tax return, you will then receive credit for the 20% withheld.

What happens if you don’t deposit the distribution check into an IRA and/or come up with the full 20% that was withheld? Well, if you don’t deposit the entire the full distribution, the entire amount will be subject to not only state and federal income taxes, but also a potential 10% premature distribution penalty (if you are under age 59 ½)—courtesy of the IRS. If you roll over the distribution, but not deposit enough monies to cover the 20% that had been withheld, you will be subject to taxes on that 20%, plus the potential 10% premature distribution penalty.

Should I just take a taxable distribution?
Taking a taxable distribution from your old 401(k) retirement account subjects you to state and federal income taxes. If all of the money contributed was pre-tax, that means you will owe taxes on the full amount. The government will still withhold 20%. Of course, this will still get credited towards the taxes you owe when you do your tax return next year.

Just remember this, if you wanted the access to the cash and thought you would be getting a $100,000 check from your old 401(k) that was worth $100,000– you certainly don’t want to be surprised when the check you get is actually only $80,000. And remember, if you are under age 59 ½, you may also be subject to the 10% IRS premature distribution penalty (subject to certain exceptions, like death (in which case it may not matter much to you), disability, or by electing something called “substantial and periodic payments” (also known as Rule 72t).

We are here to help 
If you have any questions, please feel free to contact us. At RockCrest Financial L.L.C., we offer a range of financial services, including retirement planning and investment management. Your retirement is vitally important to you, so it’s a top priority to us.