Options available when rolling over 401(k)

Q. Im 56 years old and I have recently switched jobs. Id like to rollover my old 401(k) retirement plan to an IRA for more investment choices. Any reason why I should not do this?

A. When you leave an employer you can rollover your 401(k) retirement account to your own IRA account. There are many similarities with 401(k)s and IRAs, such as pre-tax contributions, tax-deferred growth, etc. There are also some striking differences.

If you need to liquidate and spend some of your retirement account before age 59, the 401(k) has an advantage. If you leave your employer at age 55 or later, you can withdraw money from your 401(k) and not pay a penalty (you will have to pay normal income taxes on this withdrawal). In an IRA, you must wait until after age 59 before you can withdraw money penalty free. In your case, since you are age 56, your 401(k) allows for penalty free withdrawals; if you rollover to an IRA, you will not be penalty free on withdrawals for another 3 years.

Another consideration is borrowing. Does your new employer have a 401(k)? If so, do you like the investment choices? If the answer to both is yes, then you should think about transferring your old employers 401(k) account to your new employers 401(k) account. Then you can borrow some of this money, without current income tax. Of course, this is a loan, and you must pay back the loan plus interest, generally through payroll deduction. You cannot borrow from an IRA.


If you take money out of your retirement account before retirement, this will reduce the amount of money you will have remaining for retirement. I recommend that you talk with your financial planner on this. There are many details and tax consequences to consider.

Q. Ive decided to retire next year. I have a small pension, a 401(k) plan, and some investments. The pension alone will not be enough each month for me to live on (Im single no dependents), so Ill need some extra money each month to be comfortable. My question is should I start taking social security next year (Im 62 years old) to make up the difference, or should I take the money from my investments and 401(k) plan?

A. You have quite a decision on your hands. If you take the social security next year, you will effectively lock in that amount for the rest of your life (except for cost of living increases). This will allow your other accounts to grow. However, if you do not take the social security next year, that benefit will increase by about 8% each year you wait until age 70. Thats effectively an 8% annual return, guaranteed by social security. Your investment and 401(k) can return that much, or they may not. We dont know what future rates of return will be.

I would be inclined to make up the monthly difference of income from your investments and 401(k), and wait to start social security until at least age 66 (full retirement age) or possibly age 70. A thorough study of your financial assets and goals is needed here. Please contact your financial planner to work on your particular situation.

(Do you have a question about your financial affairs? Financial planning consultant, Robert S. Pennartz, CFP takes calls at 1-302-654-5556, extension 138 or 1-800-366-0632, extension 138. A selection of these questions and Pennartzs responses are published in this column. Anonymity is assured.)

Robert S. Pennartz, CFP is a Financial Planner at the Financial House, a Registered Investment Advisor, in Centreville, DE. Bob lives in Pocopson Township with his wife and children. He is a registered representative offering securities through Lincoln Financial Securities Corporation, Member SIPC, branch office: 5818 Kennett Pike, Wilmington, DE 19807. Lincoln Financial Securities Corporation and The Financial House are not affiliated. Lincoln Financial Securities Corporation and its representatives do not offer tax or legal advice. You should consult your individual tax or legal professional regarding your individual circumstances.