Protecting Your 401K
If you’re changing employers, one of the many transitions you’ll face is what to do with the money you’ve accumulated in your 401(k). Making the right choice can keep you on track for a financially secure retirement, but making the wrong choice can wind up costing you plenty. Let’s take a look at your options.
Cashing Out
Unless you’re facing a financial emergency that leaves you no other option, it’s usually a bad idea to cash out your 401(k). Why? For starters, tapping your retirement funds early accelerates tax liability and can subject you to stiff penalties.
You’ll owe federal income taxes – and, depending on where you live, maybe state and local income taxes as well – on any cash you withdraw, as well as an additional federal penalty of 10% if you’re younger than age 59 . (One exception: If you’re older than age 55 when you leave your job, you may be exempt from this penalty. Ask your tax adviser.) Bear in mind that your employer also is generally required to withhold 20% of your distribution as a down payment on your federal income tax bill.
In addition, by withdrawing funds you’ll not only reduce the size of your nest egg but also lose its tax-deferred growth potential. The combined effect of significant tax penalties and lost appreciation potential can be enormous.
Leaving Your 401(k) or Other Qualified Plan Account Alone
As long as your account has at least $5,000 in it, by law you can’t be forced out of the plan, and your simplest option may be to do nothing and maintain your existing qualified-plan account.
There can be many reasons to choose this option. For example, your old plan may offer a particularly good lineup of investment choices. Or perhaps your new employer’s plan is significantly inferior to your current one, or restricts eligibility for participation to employees with at least one year of service.
Whatever the reason, if you’re happy with your old 401(k) account, you may not want to change a thing.
Rolling Your Account Over
Although you can keep your old 401(k) account active, you won’t be able to make additional contributions to it after you switch jobs. If you wish to streamline the number of accounts you own, consider rolling over your 401(k) savings into your new employer’s 401(k) plan – or into an IRA.
Which is better? It depends on your particular needs. Even though there aren’t major differences between the two options, both have their benefits and drawbacks.
If you’re planning to participate in your new employer’s 401(k) and you don’t already have an IRA, rolling over to the new 401(k) may be the more streamlined option because you’ll have only one account to keep track of.
But an IRA offers an important advantage: It can provide you with more flexibility. If you want to own a specific mutual fund or security in your retirement account, you can find an IRA custodian that will allow you to do so.
A 401(k), by contrast, limits you to the options your employer chooses to make available to you. Some plans offer a broadly diversified collection of strong-performing funds. Others are limited to only a few funds with middling track records. If you’re not sure about the quality of your new plan, your financial adviser can help you evaluate it.
Keep in mind that IRAs can have their downsides, too. For one, they typically charge investors modest administrative fees, while employers typically pick up the costs involved with a 401(k) plan. Also, IRAs can’t allow loans, while some 401(k) plans do. (Ask your 401(k) administrator about the specific benefits available to you.) On the other hand, IRAs offer more opportunities for penalty-free withdrawals before age 59 .
Go Direct
Whichever option you choose, a direct rollover is usually best. For instance, a rollover IRA into platinum or any other precious metal for that matter could act as an inflation hedge. With a direct rollover, you never take formal possession of your funds. The administrator of your old 401(k) plan transfers your assets directly to your new 401(k) administrator or IRA custodian. In some cases, the check will first be sent to you to hand over to your new administrator. As long as the check isn’t made out to you personally, this is still considered a direct rollover.
An indirect rollover is when you take personal possession of your assets before ultimately rolling them over. In this case, if you don’t redeposit the funds within 60 days, it’s considered a distribution, and you’ll owe income taxes and, generally, an additional 10% early-withdrawal penalty.
Your former employer also will be required to withhold 20% of your account value for federal income taxes, even though you’re then doing a tax-free rollover. Generally, this option doesn’t make sense. If you wind up having withholding, don’t forget to replace this amount when you roll over the funds within 60 days to avoid additional taxes and penalties.
Keep Saving
The good news is that changing jobs doesn’t have to mean interrupting your retirement savings plan. Avoid the expensive trap of cashing out your 401(k), and you can continue to make progress toward your long-term financial goals.
Presented by John Steiger, ChFC, AEP Certified Financial Planner
At Cleary, we are committed to a holistic approach of protecting and preserving our clients’ financial assets. Give us a call today at 617-723-0700 and let us know how we can help you.
Home and Automobiles in Living Trusts
As individuals and families look to preserve their assets against the uncertainty of tomorrow, the formation of a living trust is a viable estate-planning technique. It is not uncommon for a home and other major assets such as bank accounts, investments, and sometimes automobiles, to be transferred to a trust for that purpose.
Although attorneys handling the formation of the trust address the insurance implications, it is necessary to notify your insurance agency. In the case of a home, the name of the trust as well as those of the trustees must be added to the homeowner’s policy as “additional insured.” This is necessary for the asset to continue to be properly covered by your insurance policy.
The same holds true if you transfer the ownership of your automobile to your trust.
“When you put property in a living trust, the trust becomes its owner, which is why you must transfer the title to the property from your own name to that of the trust.”1 Thus, it is important that the applicable insurance policy (whether it is home or auto) reflects the insurable interest of the deeded owner of the property. In most cases the occupant (a beneficiary of the trust) is the named insured, and the trust or trustee is an additional insured on the policy. Most insurance carriers do not charge an additional premium to add a trust to a policy.
If the ownership of your home or automobile has been transferred to a trust, please contact your Cleary representative to discuss.
Concerned about your personal insurance coverage? At Cleary, our experienced Personal Lines department will work with you to evaluate your insurance needs, identify exposures, and create a customized insurance portfolio. Give us a call today at 617-723-0700.
1 Chapter 5, page 2, American Bar
http://www.americanbar.org/content/dam/aba/migrated/publiced/practical/books/wills/chapter_5.authcheckdam.pdf
Contract Surety Bonds
You don’t hear about government entities using stimulus funds on uncompleted public works projects despite numerous contractor failures during the recent economic downturn. Why is this? Public works projects have a third-party guarantee that ensures that projects are completed and that all bills to subcontractors and suppliers are paid. This guaranty is offered by a surety company and the guarantee is known as a surety bond.
The surety concept is not new. Originally it involved an individual providing surety for another individual. As a result of federal taxpayer losses on uncompleted construction and service contracts in the late 19th century, there have been several pieces of legislation enacted to protect taxpayers from these types of losses. The late 1800s saw the advent of well-funded corporate sureties stepping into the surety bond marketplace. They served as a mechanism to encourage trade over long distance.
Currently, the Miller Act at the national level and “little” Miller Acts at the state level require a surety bond in place on all public projects. However, they do have varying thresholds as to when they are required. For instance, a performance bond is not required on federal contracts under $100,000.
An entity looking to obtain surety “credit” must pass a rigorous prequalification process, much like obtaining a bank loan. The surety evaluates the contractor’s credit, financials, and experience to determine if it will extend surety credit. This process also serves to assist government entities in making sure that only the most qualified contractors are able to bid on government work.
As the New England Regional Director of the National Association of Surety Bond Producers, we work in conjunction with the surety industry to make certain smaller and minority contractors get qualified to participate on government contracts. If you have any questions or think you may be a candidate for a contract surety bond, contact Michael Regan at Cleary Insurance.
At Cleary, we will evaluate your business exposures and work with you to develop a comprehensive plan to safeguard your business. We are members of the National Association of Surety Bond Producers (NASBP), the professional organization for agents that also specialize in surety bonding. Give us a call today at 617-723-0700.