Company Employees and Retirees with 401ks

RIS provides advice to company executives and retirees with 401k, stock saving plans and deferred compensation plans. There are at least four issues that can be problems or challenges to these plans that you might want to be concerned about.

FIRST, there are provisions in some 401ks that make it very disadvantageous for retirees to stay in the plan after they retire. If you are not careful, it can have a big impact on your heirs, and certain decisions could mean your heirs could get only 10% or 20% of what they might otherwise get. For example, if a couple dies with $500,000 in their 401k, the 401k may distribute the assets to the heirs (children) within 60 days, and they may have to pay up to $200,000 in income taxes. If this were handled properly, we could get those $500,000 in assets into an account that will grow tax deferred and could distribute $2.5 million to $5 million to the heirs over their lifetimes. Do not ignore this issue. If you are a retiree with a family and are still in your 401k, you need to set up an appointment with us as soon as possible.

SECOND, it may be advantageous for some of you to distribute your Company shares in the Company Stock Fund in the 401k directly to yourselves. If handled correctly, you can get the gains in the Company Stock Fund treated as long-term capital gains rather than ordinary income. That means a tax rate of 20% on long term capital gains versus a tax rate up to 39.6% for ordinary income. We can help you determine whether you should take advantage of this. We will examine the costs and benefits. But, you have to examine this before you rollover your 401k to an IRA or otherwise liquidate your Company Stock Fund holding.

If you have held the Company Stock Fund in your 401k for a long time, do not sell your Company Stock Fund without talking to us first. This applies to existing employees and retirees. If you are retired, do not rollover the 401k without talking to us first. There are important benefits that can be permanently lost if you take certain actions.

THIRD, we find many executives have a large portion of their net worth tied up in Company stock in the form of (1) direct stock ownership, (2) ownership of the Company Stock Fund in the 401k and (3) indirect ownership of Company through unrealized gains in Company stock options. In some cases, Company stock is too large a percentage of your family’s net worth. We help determine which of the three types of ownership should be sold first.

FOURTH, the Company pension that a retiree may receive can be a very meaningful portion of their income during retirement. If this is true for you, we can show you how this can and probably should have a significant impact on your mix of investments – the percentage you have in equities and fixed income. This mix, of course, is one of the most important parts of determining the future size of your retirement nest egg for your use or for your heirs.

If you find the right financial advisor, the value of the advisor could be a multiple of the cost that the advisor charges. We try to make these complicated issues easy for you to understand and act upon. You have worked long and hard for the benefits you can enjoy in retirement. It is important for you to make sure you get all the benefits that you deserve and avoid costly mistakes in implementing your retirement decisions.

There are other issues that apply to all 401k participants and retirees that you can read about in Our Services and RIS 10 Steps to Wealth.

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Retirement Income Solutions, Inc. is an independent Registered Investment Advisor.