401k Advisors Reveal 7 Things They Wish Investors Knew

By : Teresa Conley | August 31, 2020

Clients often come to our 401k advisors with questions about their accounts. It’s understandable; with all of the retirement plan options out there, it’s easy to have questions about which strategies are the most effective.

Teresa Conley is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

Read on to discover the 7 things 401k advisors wish every investor knew about 401k plans, so they could make the most of this investment tool.

1. Don’t Leave Your Job Before Exploring Your 401k Rollover Options

When you’re transitioning from one employer to the next, you can transfer the funds in your 401k into an individual retirement account, or IRA, without incurring taxes. Known as a 401k rollover, this method allows you to transfer 401k funds directly into an already-established IRA. If you have multiple 401k accounts, you may want to consolidate them into a single IRA.

2. Incorporate an Automated Portfolio into Your Financial Strategies

Does your current 401k plan offer automated investment decisions or a choice of single funds? Under certain circumstances either of these may be an effective tool for you. In one scenario you are able to pick your target retirement year and then watch the program allocate your funds across asset classes for instant diversification. Alternately, automated systems can allow you to choose an investment style, then design your portfolio accordingly. However – we strongly encourage you to complete your due diligence when researching these funds as they are not all created equal and may not be appropriate for your unique situation.  

3. Consider Stable Value Funds as Part of Your Strategic Financial Plan

As retirement age nears, you may want to shift some funds into a safer option, such as stable value funds. These funds don’t fluctuate as much as stock funds and aren’t tied to interest rates, like bond funds. Your retirement planning advisor can help you decide how much to move into stable value funds.

4. Your Options May Increase at Age 55

While you may think that if you withdraw from a 401k before age 59 1/2, you’ll incur a 10 percent early withdrawal penalty, this isn’t always the case. Some 401k plans include a provision for investors who leave their employer after they turn 55, but before they turn 59 1/2, that allows for penalty-free withdrawals. Remember, once you rollover 401k funds into an IRA, the age-55 provision no longer applies.

5. Your 401k Funds are Protected by Law

401k Advisors

Funds held in a 401k are protected from creditors, so it may not be a good idea to use 401(k) funds to prevent a foreclosure or pay down debt. If you have to declare bankruptcy in the future, 401(k) funds are considered a protected asset.

6. Wealth Management Strategies: Consider the Roth

Many 401k plans allow you to make Roth contributions. Known as a designated Roth account, such contributions aren’t tax-deductible — unlike your 401k contributions — but they’ll grow tax-free and you won’t have to pay tax when you take distributions in retirement. Your wealth advisor can help you determine if it makes sense for you to take a deduction today or in retirement.

7. Reduce Your Tax Burden with Company Stock

Does your 401(k) plan include an employee stock ownership plan or ESOP? If you hold a significant amount of company stock, you may be eligible for net unrealized appreciation (NUA). This special tax rule may allow you to distribute company stock, paying taxes on the cost basis, then pay taxes at the typical capital gains rate when you sell the stock.

Just because you can use the NAU option doesn’t mean it’ll benefit you. Your 401k advisor can help you determine which choices are best for your situation.

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