According to a recent article in the Los Angeles Times, Virgin Orbit is laying off 675 employees, or about 85% of its workforce, after failing to secure funding. The company, founded by billionaire Richard Branson, had been in operation for just over a year and had completed two satellite launches.
The layoffs affected all but 100 employees at Virgin Orbit. The company’s CEO, Dan Hart, said that laying off employees was “heartbreaking” but necessary to “ensure the long-term viability of the company.”
The layoffs leave many people wondering what to do with their 401k plans. If you are one of these people, you may be considering rolling your 401k over to another plan.
When deciding what to do with your 401(k) when you change jobs, there are many factors to consider. Here are some pros and cons of rolling your 401(k) into an IRA, leaving it where it is, or transferring it to a new employer’s plan:
Rolling your 401(k) into an IRA
Advantages:
- Non-Taxable Event: You can roll your 401k into an IRA without a 10% premature distribution penalty and maintain your tax-deferred status (assuming you’re under age 72).
- More Investment Options: Rolling over into an IRA gives you more control over your investment options. Unlike being limited to just a few mutual funds with your 401k, IRAs provide thousands of choices, including ETFs, individual stocks, bonds, mutual funds, and annuity contracts when appropriate. So you may be able to access investment choices that were not in your old plan or new plan.
- Communication: When you leave your account with an old employer, it can be hard to get the necessary information and access the information you need. You may have trouble reaching someone with authority since you are not in the office.
- New IRA Provider: May provide you with advice and access to financial planning tools
Disadvantages:
- Higher fees: There are fees associated with hiring a financial advisor. You could choose to manage on your own or at a discount brokerage firm or seek the advice of a financial advisor. Financial advisor fees usually range from 1 to 2 percent of the assets under management. Many people find value in the relationship is worth the added fees.
- Company Stock: Liquidating and rolling company stock out of your former 401K may have negative tax consequences.
- RMD’s required even if working: Unlike a 401K, even if you are still working, RMD’s are required from IRA’s.
- Early Withdrawal Penalties: If you withdraw before 59 ½ from an IRA, there will be a 10% penalty. So, if you are unsure you will need the money, a rollover might not be a good idea. When separating service between 55 & 59, ½ distributions from your 401k plan would not be subject to the 10% penalty.
- Creditor Protection: IRA assets are generally only protected against creditors in the case of Bankruptcy.
- Investment access: Some investment choices in the 401K may not be available inside your new IRA.
Leaving the money in the current plan
Advantages:
- Simplicity: This option is the easiest in terms of paperwork and logistics since the participant doesn’t need to do anything.
- Protection from creditors: Some employer-sponsored plans provide more protection from creditors than an IRA or a new employer’s plan.
- Low-cost investment options: Some plans offer low-cost investment options that are not available elsewhere.
Disadvantages:
- Limited investment options: Some plans have limited investment options or high fees, which can hinder the growth potential of the account.
- No contribution flexibility: The participant can no longer contribute to the old plan once they leave the company.
- No consolidation of accounts: Leaving the money in the old plan means the participant
- will have multiple retirement accounts to keep track of.
Rolling the money over to a new employer’s plan
Advantages:
- Consolidation of accounts: This option allows the participant to consolidate their retirement savings into one account.
- Access to potentially better investment options: The new employer’s plan may offer more investment options or lower fees than the old plan.
- No taxes or penalties: Rolling over to a new employer’s plan is not a taxable event, and there are no penalties.
Disadvantages:
- Limited investment options: Like the old plan, the new employer’s plan may have limited investment options or high fees.
- No flexibility with investment choices: The participant is limited to the investment options offered by the new employer’s plan.
- Possible delay in rollover: The participant may need to wait until they are eligible to participate in the new plan, which could delay the rollover process.
Cashing out the money invested in your 401K
Advantages:
- Immediate access to funds: Cashing out allows you to access the funds immediately which could be helpful in times of need.
- Flexibility: Once you cash out, you have complete flexibility in how to use the funds. You can use the funds to pay off debt, make a large purchase, or invest in something different.
- Elimination of Market Risk: If you cash out, you are no longer exposed to the fluctuations of the market.
Disadvantages:
- Taxes and penalties: Cashing Out your 401K or IRA before reaching retirement age (59 1/2) may result in taxes and early withdrawal penalties.
- Loss of tax-deferred growth: Retirement accounts such as 401K and IRA’s offer tax advantages, such as tax deferred growth or tax free withdrawals in the case of Roth
- Accounts. Cashing out means you’ll lose the potential for further growth and the compounding effect over time.
- Diminished retirement savings by cashing out: By cashing out, you’re depleting your retirement savings. This can impact your financial security in the future.
Ultimately, the best option for a participant depends on their individual circumstances and needs. It’s important to carefully consider the advantages and disadvantages of each option before making a decision.
If you would like a complimentary consultation to see if rolling your 401k into an IRA makes sense for your situation, call our office at 562-432-3783 or email us at info@scottbishop
We can provide personalized advice to help you make the best decision for your financial future. Don’t hesitate to contact us if you have any questions or are interested in exploring your options further.