Retirement and your 401(k)


Apr 05, 2023

Deciding when to retire is a difficult decision. Even if you are comfortable that you have enough money saved, there are other factors in the decision. What will you do to fill your day? If your career was a big part of your identity, are you ready to let that go? You’ll have some financial decisions to make pertaining to Medicare and Social Security. Finally, and arguably the biggest financial decision is what to do you with your 401(k) plan. There are three options choose from and we’ll review each of them below.

Cash Out

You can cash it out and take the money. In almost every situation, this would not be a wise decision. You would have to pay taxes on the entire balance. Depending on the balance, that would likely mean paying taxes at higher rate than deferring it and taking smaller amounts over time.

Leave it in the Plan

Maybe you like the plan. Assuming the plan provisions permit, this isn’t a bad option. If you are comfortable picking your own investments from the plan lineup or have a relationship with the plan advisor, this should be a consideration. There are small items to consider like withdrawal options when you need to start accessing the money and the fees associated with partial withdrawals. We would recommend consulting with the plan advisor and/or your plan administrator if you would like to explore this option.

Roll Over to an IRA

While this is the most popular option, it is important to understand that you are not required to this in most cases. The financial industry has done a great job of making people think this is the only option upon retirement. The reality is there is usually the option to leave it in the plan. The IRA does offer some distinct advantages. It is important to note that those advantages can come at a higher cost than the plan. You have to take the time to weigh what is important to you decide if it is worth the additional cost.

The IRA has more investment options for you to consider. If you enjoy making your own investment decisions, this can be an advantage for you. With the race to zero in brokerage fees, this may actually result in a cost reduction for you when measured against the plan.

If you consult with a financial advisor, then the advisor will come at a cost. It is a fair question to ask the advisor what the difference in cost would be to work with him or her vs. staying in the plan. It is also important to understand how the advisor is compensated. If the advisor is compensated by commission and is recommending to move it all to one financial product, like an annuity, that may be a red flag. The advisor should be taking the time to understand your situation and should explain where his or her recommendations fit in.

At the end of the day, it is one of the biggest decisions you will make in your life as it will set the stage for the retirement chapter. It is worth your time to weigh out the options available to you. If you value the advice of a financial planner and the cost is reasonable to you for the service provided, then the difference in cost shouldn’t matter. If, after going through the process of looking at your options, you determine that you would rather do it yourself, you can keep it in the plan or open your own IRA. Either way, the most important thing is that you make an informed decision with most likely your biggest financial asset.  


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