3 Best Options for Your 401(k) After Retirement in Pennsylvania

If you’re retiring in Pennsylvania and have money in a 401(k), one of your biggest financial decisions may be what to do with that retirement account after you leave your employer.

Should you leave your 401(k) with your former employer? Roll it into an IRA? Or use some of your retirement savings to create guaranteed retirement income through an annuity?

There isn’t one answer that’s right for every Pennsylvania retiree.

At Mintco Financial, we believe the decision should be based on your complete retirement picture — including taxes, investment choices, fees, income needs, risk tolerance, Social Security, other retirement accounts and estate-planning goals.

What Happens to Your 401(k) When You Retire?

Retirement doesn’t necessarily mean you have to immediately move your 401(k).

Depending on your former employer’s plan rules and your account balance, you may be able to leave the money in the existing plan.

You may also be able to roll eligible assets into an IRA or potentially use some retirement assets to purchase an annuity.

The important thing is to understand the advantages and disadvantages before making an irreversible decision.

Option #1: Leave Your 401(k) With Your Former Employer

One option is simply to leave your retirement savings in your former employer’s 401(k) plan if the plan permits it.

This can sometimes be an excellent choice.

Potential Advantages

• You may have access to low-cost institutional investments.
• Your employer may have negotiated favorable investment expenses.
• You don’t have to immediately make a rollover decision.
• Qualified retirement plans generally have significant federal creditor protections.
• Your plan may offer investment options that are difficult to duplicate elsewhere.

Potential Disadvantages

• Investment choices may be limited.
• You no longer have an employer relationship with the company sponsoring the plan.
• Managing several old 401(k)s can become complicated.
• Distribution and withdrawal options may be less flexible than an IRA.
• You remain subject to the rules and investment menu of that particular plan.

Before moving the account, compare the actual costs and benefits of your 401(k) with the alternatives available to you.

Option #2: Roll Your 401(k) Into an IRA

A second option is a 401(k)-to-IRA rollover.

A properly completed direct rollover can generally move eligible retirement assets from your employer-sponsored retirement plan to an IRA without creating a current taxable distribution.

This can give you greater control over how your retirement savings are managed.

Potential Benefits of an IRA Rollover

• A potentially broader range of investment choices
• Ability to consolidate multiple retirement accounts
• Potentially simpler account management
• More flexibility when building a retirement portfolio
• Ability to work with the financial professional of your choice
• Potentially easier beneficiary and estate organization

Do You Have Several Old 401(k) Accounts?

People who change employers several times during their careers can reach retirement with multiple 401(k) accounts.

For example, you might have:

• $175,000 in one former employer’s 401(k)
• $90,000 in another plan
• $225,000 in your most recent employer’s plan
• Several smaller IRA accounts accumulated over the years

Consolidating appropriate accounts can make it easier to understand your overall asset allocation, monitor investments and coordinate withdrawals.

However, consolidation should not be automatic. An old 401(k) may contain particularly attractive investment options or other benefits that could be lost after a rollover.

Option #3: Use an Annuity for a Portion of Your Retirement Savings

Some Pennsylvania retirees are less concerned about maximizing investment growth and more concerned about one question:

“How can I create reliable income that I won’t outlive?”

Depending on your circumstances, an annuity may be one tool to consider for a portion of your retirement savings.

Annuities are insurance products and come in many different forms. They should not all be treated as though they are the same.

Fixed Annuities and MYGAs

A fixed annuity can provide a stated interest rate for a specified period, subject to the terms of the insurance contract.

A Multi-Year Guaranteed Annuity (MYGA) provides a guaranteed interest rate for a selected term, such as three, five or seven years, depending upon the product.

MYGAs are sometimes compared with bank CDs because both can offer a predictable rate for a defined period. However, they are very different products.

MYGAs are issued by insurance companies, are not FDIC-insured, and can have surrender charges and tax rules that differ from CDs.

Fixed Indexed Annuities

A fixed indexed annuity, or FIA, is another type of insurance contract.

Interest-crediting potential is tied to the performance of an external market index according to the contract’s crediting formula. The money is not directly invested in the stock market.

Fixed indexed annuities generally provide protection against direct market losses to the contract value from negative index performance, subject to contract terms. However, withdrawals, surrender charges and other contract provisions can reduce account value.

Can an Annuity Create a Personal Pension?

Certain annuities can provide guaranteed lifetime income through annuitization or optional income benefits, depending upon the contract.

This is why some retirees think of an annuity as creating a form of “personal pension.”

Instead of asking only how much their investments might grow, they want to know how much predictable income they can generate each month for the rest of their lives.

For example, a Pennsylvania retiree might have income from:

• Social Security
• A traditional pension
• An annuity providing contractual income
• IRA withdrawals
• Investment accounts
• Cash savings

The objective isn’t necessarily to put all retirement savings into an annuity.

It may be to determine whether allocating a portion of retirement assets toward predictable income allows the remainder of the portfolio to serve other purposes.

Should You Roll Your Entire 401(k) Into an Annuity?

Not necessarily.

An annuity can be appropriate for some retirees and inappropriate for others.

You should consider liquidity needs, surrender periods, fees, income needs, other investments, emergency savings, health, beneficiaries and the financial strength of the issuing insurer.

Be cautious of anyone suggesting that your entire 401(k) automatically belongs in one insurance product.

Pennsylvania Taxes and Retirement Income

Pennsylvania has retirement-income tax rules that can be particularly important when developing a retirement distribution strategy.

Pennsylvania generally does not tax qualifying retirement income received after meeting applicable retirement eligibility requirements, although the rules depend upon the type of distribution and individual circumstances.

Federal income-tax rules are separate and still apply.

Before completing a rollover or establishing a withdrawal strategy, consider both federal and Pennsylvania tax treatment with your qualified tax professional.

Direct Rollover vs. Receiving the Money Yourself

If you decide to move eligible 401(k) assets to an IRA, how you execute the rollover matters.

With a direct rollover, the retirement assets generally move directly from the qualified plan to the receiving retirement account.

If a distribution is instead paid directly to you, mandatory withholding and rollover deadlines can become important.

Don’t request a check payable directly to yourself until you understand the potential tax consequences and rollover requirements.

What About Company Stock in Your 401(k)?

If your 401(k) contains appreciated employer stock, don’t automatically roll it into an IRA without first determining whether special tax treatment involving Net Unrealized Appreciation (NUA) could apply.

Rolling company stock into an IRA without analyzing the NUA rules could eliminate a potentially valuable tax-planning opportunity.

This is an area where coordination with qualified financial and tax professionals can be particularly important.

401(k) Rollover Mistakes to Avoid

• Automatically rolling over a 401(k) without comparing fees
• Ignoring valuable benefits available inside the existing plan
• Moving company stock without evaluating NUA treatment
• Putting too much retirement money into an illiquid product
• Ignoring surrender charges on an annuity
• Choosing investments solely based on recent performance
• Ignoring taxes when planning withdrawals
• Failing to update beneficiaries
• Taking a taxable distribution unintentionally

Which 401(k) Rollover Option Is Best for Pennsylvania Retirees?

The answer depends on your situation.

For one Pennsylvania retiree, keeping the employer 401(k) may be the best choice.

For another, rolling the account into an IRA may provide the flexibility he or she wants.

Another retiree may decide to keep part of the portfolio invested while using a portion to establish contractual retirement income through an annuity.

A combination of strategies can also be appropriate.

Questions to Ask Before Moving Your 401(k)

• What am I currently paying in 401(k) fees?
• What investment options will I lose if I leave the plan?
• What will an IRA cost?
• How much investment risk am I comfortable taking in retirement?
• How much monthly income do I need?
• How much liquidity should I maintain?
• Do I need guaranteed lifetime income?
• How will withdrawals affect my federal taxes?
• What are the Pennsylvania tax implications?
• How will my decision affect my spouse and beneficiaries?

401(k) Rollover Help in Pennsylvania

Mintco Financial helps individuals and families evaluate retirement and rollover strategies.

Whether you live in Philadelphia, Pittsburgh, Erie, Scranton, Wilkes-Barre, Allentown, Reading, Lancaster, Harrisburg, York, Bethlehem, State College or another Pennsylvania community, you can speak with us about your retirement options.

The objective isn’t simply to “roll over your 401(k).” The objective is to determine which strategy best supports the retirement you’ve spent decades preparing for.

Disclosure: This material is for general educational purposes and should not be considered individualized investment, tax or legal advice. A rollover may not be appropriate for every investor. Consider investment options, fees and expenses, services, withdrawal rules, creditor protections, tax consequences and other characteristics before moving retirement assets. Annuity guarantees are subject to the claims-paying ability of the issuing insurance company. Fixed indexed annuities are not direct investments in a securities market index. Withdrawals may be subject to surrender charges and income taxes. Consult appropriate financial, legal and tax professionals regarding your individual circumstances.