401k Options

I have a buddy who asked me some advice on 401ks. He has two from previous employers, he doesn't know what to do with them. Not sure what they are worth, he is a BOH mgr at a high end restaurant that gives nothing for retirement.
I want to have a retirement dialogue with him. First off, what are his options with the 401k, should he just leave them be? Can he roll-them up into one 401k? Can he transfer it into an annuity or ira?

My knowledge so far of these things are max out qualified plans, supplement with an annuity for deferred (or immediate) income when retiring. Add life insurance for a diversified income stream. Any other ideas (I purposely left out SS planning, he's young and doesn't plan on seeing it, it will be bonus money used to cover inflation)?
Thank you!
 
I have a buddy who asked me some advice on 401ks. He has two from previous employers, he doesn't know what to do with them. Not sure what they are worth, he is a BOH mgr at a high end restaurant that gives nothing for retirement.
I want to have a retirement dialogue with him. First off, what are his options with the 401k, should he just leave them be? Can he roll-them up into one 401k? Can he transfer it into an annuity or ira?

My knowledge so far of these things are max out qualified plans, supplement with an annuity for deferred (or immediate) income when retiring. Add life insurance for a diversified income stream. Any other ideas (I purposely left out SS planning, he's young and doesn't plan on seeing it, it will be bonus money used to cover inflation)?
Thank you!

How old is he? Does he plan on contributing? When does he think he'll retire? What is his risk tolerance?

He could easily roll them into an annuity, transfer them out of the 401K and into an IRA using an annuity (fixed, indexed, variable) whatever other investment vehicle or product the two of you see fit. He could also leave them there. It all depends on his unique situation.
 
I have a buddy who asked me some advice on 401ks. He has two from previous employers, he doesn't know what to do with them. Not sure what they are worth, he is a BOH mgr at a high end restaurant that gives nothing for retirement.
I want to have a retirement dialogue with him. First off, what are his options with the 401k, should he just leave them be? Can he roll-them up into one 401k? Can he transfer it into an annuity or ira?

My knowledge so far of these things are max out qualified plans, supplement with an annuity for deferred (or immediate) income when retiring. Add life insurance for a diversified income stream. Any other ideas (I purposely left out SS planning, he's young and doesn't plan on seeing it, it will be bonus money used to cover inflation)?
Thank you!

He can transfer to a new 401k if his current employer offers one or he can rollover to an IRA (he can choose the IRA regardless of a 401k plan availability at his current employer).

If he rolls to an IRA, he could make contributions to that IRA, but if he does that he'll be co-mingling funds and will not be able to roll former 401k funds into a future 401k (he can do that if he makes no contributions and does not combine with a different IRA). Not that having that options is particularly useful, just saying.
 
Depending on the size of the portfolio, it may be more advantageous to keep these in a self-directed 401k rather that an ira. Additional info here:

http://www.irs.gov/pub/irs-tege/forum08_401k.pdf

Though investment choices may be limited as compared to IRAs, the one advantage to keeping funds in a 401k is that it makes rolling others IRAs to a roth (or waht is commonly referred to as a backdoor roth) much easier.
 
You should explain to him the tax implications of putting money in a 401k and tell him to put it in a roth or a life insurance policy.
 
First, you need guidance from someone who KNOWS about 401k and what you can do with them when someone separates from service.

When someone separates from service that participated in a company retirement plan, the 401k custodian will send out (by request) a from called IRS 401(f) that outlines your available options.

BTW, when on the phone with the custodian asking for the rollover proceeds to be payable to the new IRA, it helps to have printed this off so the participant can say that they have received and reviewed the IRS Special Tax Notice.

Here is a sample 402f:
http://www.varetire.org/Pdf/Publications/irs-402f.pdf

Option 1: You can cash it out directly. There is a mandatory 20% tax withholding with this option and a 10% penalty due when the participant files their taxes.

Option 2: You can roll it over to a new 401(k). This is only an option if the person is working for a company that offers a 401k plan or is self-employed to set up a "solo 401k" plan. (This person does NOT appear to be self-employed.) IMO, the ONLY advantage to rolling it over to a new 401k is so you can borrow against the balance.

Option 3: You can rollover (direct transfer) the balance to a traditional IRA. IMO, this is the lowest cost choice over time and offers the greatest control over your money. You can open an IRA at a bank, insurance company, brokerage, whatever.

Note: If you are 55 years of age or older when you separate from service, you can take direct cash contributions WITHOUT a 10% penalty. This is not so with a traditional or rollover IRA.

Option 4: You can take out an immediate annuity from the issuing company. I wouldn't do this as most people who are still working need their money to grow, not take token income payments from a probably small balance.


You CANNOT use a rollover to buy a life insurance policy without taking a taxable (and probably penalized) distribution. To avoid the penalty, you can do a 72t distribution schedule which is the longer of 5 years or until the participant reaches 59 1/2 years old.
 
IMO, the ONLY advantage to rolling it over to a new 401k is so you can borrow against the balance.

Another advantage is that in some states 401Ks have more protection against creditors and are often exempt from lawsuits.
(Im not saying that the 401k is a better option. But I have had business owners who chose to continue a 401k, or payout participants and convert to a Solo401K, for the enhanced protection)
 
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