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Maximizing Your Retirement: Streamline Your Old 401(k)s For Your Financial Success

Planning Retirement Business Ownership Scott's Thoughts

By: Scott Van Den Berg, CFP®, ChFC®, CEPA®, AIF®, CRPS®, CMFC®, AWMA®

As you’ve moved forward in your career, it’s not uncommon to have accumulated multiple 401(k) accounts from various employers. These accounts represent your hard-earned savings and managing them strategically is of great importance to help secure your financial future. In this article, I want to share a few key considerations and steps you can take to potentially optimize your retirement savings. Note, the same considerations below should also be taken for those of you that currently participate in a 401(k) and are considering a future change of employment or retirement.

Assess Your Old 401(k)s:

Gather all your existing 401(k) accounts from previous employers. Review the investment options, fees, and overall performance of each plan. After this review, you are then ready to compare and contrast your best available options. 

Explore Consolidation:

Consider consolidating your old 401(k) accounts into a single, streamlined retirement vehicle. This could be done through a direct rollover into a Traditional IRA Rollover, a Roth IRA Rollover, if you had money in a Roth 401(K) or, if eligible, into your current employer's 401(k) plan. 

Benefits of Consolidation:

  • Simplification: Managing one consolidated IRA Rollover account is more straightforward than juggling multiple accounts. It makes it easier to manage and track your investments, as well as facilitate your eventual required minimum distributions. 
  • More Investment Choices: IRAs often provide a broader range of investment options, including the ability to hire a registered investment advisor, compared to your employer-sponsored 401(k) plan(s). This can give you more flexibility to choose investments that align with your specific financial goals and risk tolerance.
  • Potential Cost Savings: Some 401(k) plans have higher administrative and management fees compared to IRAs. By rolling over to an IRA, you may have the opportunity to choose lower-cost investment options and reduce overall fees, potentially saving you money in the long run.

Tax Implications:

Be aware of potential tax implications when consolidating retirement accounts. A “direct rollover” is usually the most tax-efficient method when transferring a 401(k). It also helps to avoid potential penalties, while at the same time helping to maintain the tax-deferred status of your retirement savings.

Estate Planning: 

IRAs often provide more options for estate planning than 401(k)s. Below are six important areas of consideration: 

  • More Flexible Distribution Options: Traditional IRAs often provide more flexible distribution options for beneficiaries than 401(k)s. For instance, a spouse can treat an inherited IRA as their own and not be required to make withdrawals until reaching age 73, when IRS required minimum distributions begin. And for most non-spouse beneficiaries, they can stretch distributions over 10 years before they must empty an inherited IRA. This potentially minimizes the tax impact compared to a lump-sum distribution from a 401(k), though some 401(k) plans may offer a “stretch” distribution feature, but each plan can be different.
  • Roth IRA Tax Advantages: Roth IRAs offer tax-free qualified withdrawals. This can be beneficial for heirs, who can inherit a Roth IRA without triggering immediate taxation, as long as the account has been open for at least five years. This can be advantageous for passing on tax-free assets to beneficiaries. 
  • No Required Minimum Distributions (RMDs) during the owner's lifetime: Roth IRAs do not require the original account holder to take Required Minimum Distributions (RMDs) during their lifetime, allowing the account to potentially grow tax-free for a more extended period.
  • Beneficiary Designation Flexibility: IRAs often offer more flexibility in naming beneficiaries and specifying the percentage of the account each beneficiary should receive. This allows for more precise estate planning strategies.
  • Potential Creditor Protection: In some cases, IRAs, especially Roth IRAs, may offer better creditor protection than 401(k)s. This varies by state, and it's crucial to consult legal and financial professionals for advice tailored to your specific situation.
  • Simplified Inherited IRA Rules: The rules for inheriting IRAs may be more straightforward than those for inheriting 401(k)s, making it easier for beneficiaries to navigate and make informed decisions.

Seek Professional Guidance:

If you are uncertain about the best course of action, Century Management Financial Advisors specializes in retirement planning and portfolio management strategies that are tailored to your specific personal needs and circumstances.   As a wealth management firm, we help create, execute, and monitor financial plans and their associated investment portfolios. 

Bottom Line:

It is very important to consider your overall financial picture, tax implications, and the specific rules and features of your retirement accounts when making estate planning decisions. Consulting with a qualified financial advisor or estate planning professional can help you create a plan that aligns with your goals and maximizes the benefits for your heirs.

While there is no one size fits all answer, opting to roll your 401(k) over to an IRA often proves advantageous due to increased investment flexibility, potentially lower fees, simplified portfolio management, and enhanced estate planning options. The ability to maintain tax-deferred status and the potential for a more efficient distribution strategy for beneficiaries are additional benefits. 

While the decision to rollover your 401(k) ultimately depends on your personal circumstances, the rollover option generally provides more control over retirement savings. At Century Management Financial Advisors, we are here to help you make a well-informed decision in how to optimize your retirement assets, as well as your overall household financial plan.

Century Management ("CM") is an independently registered investment adviser with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. Century Management is also registered as a Portfolio Manager in the Province of Ontario. A full description of our Firm’s business practices, including our Firm’s investment management services, wealth plans and advisory fees, is supplied in our Form ADV Part 2A and/or Form CRS, which is available upon request and also at www.centman.com. This information is educational in nature and does not constitute investment advice. Past performance is not indicative of future results. CM is not making a recommendation for or endorsing any investment strategy.  All investments involve risk and unless otherwise stated, are not guaranteed.   Forward-looking statements are not guaranteed. CM does not provide legal or tax advice and the information herein should not be considered legal or tax advice.  CM-2024-02-02