Is A Rollover Right For Me?
When you retire or otherwise leave your Electric Membership Cooperative employer, you generally have 4 options to choose from regarding your EMC 401(k) plan. This article will discuss the pros and cons of each of these options. We specialize in serving EMC employees with their retirement planning and investing needs. You can schedule a no-cost, no-obligation consultation with an experienced EMC retirement advisor by clicking here.
Option 1: Cash Out – Take a full lump sum distribution directly from your qualified employer retirement plan. This option may lead to the most significant tax implications, so you are strongly encouraged to consult with a qualified tax professional before using this option.
Advantages
Immediate access to your money.
Any after-tax contributions could be taken tax-free though tax on the earnings of those contributions may be taxed.
If age 55 or older when you separate from your employer, distributions could avoid the 10% early withdrawal tax penalty (vs. 59.5 years old cutoff for IRA). Applicable state and federal income taxes still apply.
Disadvantages
Potentially significant state and federal income tax implications (e.g. higher income tax bracket) along with a 20% mandatory federal tax withholding.
If younger than 55 when you separate from your employer, an early withdrawal tax penalty of 10% may apply.
Lose future tax-deferred growth potential.
Lose protection from creditors or bankruptcy.
Option 2: Leave in Employer Plan – Leave assets in your EMC/NRECA 401(k) plan, if allowed.
Advantages
Maintain tax-deferred status.
Fees could be lower than in an IRA.
Penalty-free withdrawals if at least age 55 in the year you separate from employer (penalty-free withdrawals from IRAs at age 59 ½). Applicable state and federal income taxes apply.
The qualified plan is required to prudently monitor cost and quality of investment options.
Protection from creditors and bankruptcy.
Educational resources, tools, and phone support may be provided.
Required Minimum Distributions (RMDs) may be delayed beyond age 72 if you’re still working.
Plan may allow you to borrow against assets.
Disadvantages
Limitations on investment choices.
Limited or no access to a dedicated financial professional for investment management and retirement planning.
Subject to plan’s potentially limited distribution stipulations and rules.
Plan administration fees may be assessed.
Subject to ongoing changes made to the plan (e.g. investment choices, services, fees, providers of the plan, and plan termination)
Loss of ability to add new contributions.
Access to personalized advice taking into consideration other assets and investment objectives may not be available through the retirement plan.
Option 3: Rollover Assets to New Employer’s Plan – If you move to a new non-EMC employer offering a qualified retirement plan, you may be able to rollover assets from the “old” plan to the “new” plan.
Advantages
Maintain tax-deferred status.
Fees could be lower than in an IRA.
Penalty-free withdrawals if at least age 55 in the year you separate from employer (penalty-free withdrawals from IRAs at age 59 ½). Applicable state and federal income taxes apply.
The qualified plan is required to prudently monitor cost and quality of investment options.
Protection from creditors and bankruptcy.
Educational resources, tools, and phone support may be provided.
Required Minimum Distributions (RMDs) may be delayed beyond age 72 if you’re still working.
Plan may allow you to borrow against assets.
Disadvantages
Limitations on investment choices.
Limited or no access to a dedicated financial professional for investment management and retirement planning.
Subject to plan’s potentially limited distribution stipulations and rules.
Plan administration fees may be assessed.
Subject to ongoing changes made to the plan (e.g. investment choices, services, fees, providers of the plan, and plan termination)
Potentially more limited options for withdrawals while employed.
Access to personalized advice taking into consideration other assets and investment objectives may not be available through the retirement plan.
Option 4: Rollover Assets to IRA – Rollover assets to an Individual Retirement Account (IRA) and/or Roth IRA (account type depends on whether contributions were made before-tax or after-tax).
Advantages
Maintain tax-deferred status.
Ability to consolidated retirement savings into one account and continue making contributions.
More investment options.
More personal control.
Protection from bankruptcy.
Potentially lower-cost investment options and/or lower administrative account fees.
You can retain services of a dedicated financial professional or advisor who can provide investment recommendations and assistance with overall retirement planning.
Disadvantages
Expenses and account fees may be higher than employer plans.
IRS penalty-free withdrawals are generally not allowed until age 59 ½ for a traditional IRA.
Generally, loans against assets are not allowed.
Protection from creditors may be more limited than with employer plans.
Potential tax implications if plan includes employer stock.
You should also review this Investor Alert published by the Financial Industry Regulatory Authority titled “The IRA Rollover: 10 Tips to Making a Sound Decision”.
It’s important for you to know that our firm and other investment adviser have an inherent conflict of interest when provideing a rollover recommendation as a rollover to an IRA managed by the advisor will result in compensation to the advisor whereas the other options typically will not.
Investment advisory services are offered through Halley Hill Wealth Management LLC (HHWM), a registered investment adviser offering advisory services in Georgia and other jurisdictions where registered or exempted. This material is provided for the purposes of gathering data and general investor education. It is not intended as investment advice for any specific investor and should not be used as such. Nothing in this material should be interpreted as tax or legal advice and these types of advice are not provided by HHWM. Investments and returns are not guaranteed and may lose value. There is no guarantee the strategies discussed in this document will be effective and strategies may not be appropriate for all investors.
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