Deciding What to Do With Your 401(k)

When you leave your job or retire, you have to decide what to do with the money in your current employer’s retirement plan. You worked hard to accumulate this nest egg. It may even be your most significant financial asset. So, you want to make your decision carefully. Below we offer some guidance as you go about making up your mind.

You have four main choices for distribution

For most plan participants, there are four main options for a 401(k) account:

Each of these options has advantages and disadvantages to consider. Below the table lists pros and cons of each choice. When considering your choices, keep in mind your own situation and your specific needs to determine what works best for you.

Four options for your 401(k)

OptionsAdvantagesDisadvantages
Leave your 401(k) money where it is
Your money continues to compound tax-deferred until withdrawal.

Your account is not depleted by payment of income tax or a premature distribution penalty.

In the case of bankruptcy or other judgments, 401(k) accounts generally offer greater protection from creditors than IRAs.

Not all employer plans permit this.

If you take a distribution from the plan, there is a 20% federal tax withholding. If you are below age 59½, you may face a 10% penalty. (Exception: Participants who terminate employment in the year they turn 55 or later are exempt from the premature distribution penalty.)

Your employer plan may not be able to help you choose how to allocate your funds.

You may have limited access to your money or extra paperwork to authorize a redemption.

If you’re married, then your spouse is required to sign-off on distributions. Your spouse is automatically your beneficiary unless they waive that right in writing.

When you pass away, beneficiaries can only keep the money in the 401(k) for five years.
Roll over your 401(k) money to an IRAYour money continues to compound tax-deferred until withdrawal.

Your account is not depleted by payment of income tax or a premature distribution penalty.

Many IRA providers can help you decide which funds to purchase (asset allocation).

You can consolidate other Rollover IRA accounts into one account to simplify your retirement savings.

You may be able to use these savings penalty-free, for example, if taking an early distribution for education or the first-time purchase of a home.

IRAs provide easy access to your money, no waiting period and no need to obtain spousal consent. You can withdraw assets at anytime.

You have more flexibility regarding beneficiary selection.
If you take a distribution from your IRA prior to age 59½, you may face a 10% penalty.

Mutual fund fees and expenses are typically higher than for 401(k) investments.

Direct rollovers are not limited in number, but you may only make one indirect rollover every 12 months across all your IRA accounts.
Transfer your 401(k) money to your new employer’s 401(k) planYour money continues to compound tax-deferred until withdrawal.

Your account is not depleted by payment of income tax or a premature distribution penalty.

Consolidates your retirement accounts.
You may not be eligible for the plan right away.

Investment choices may be limited.

You may have limited access to your money
Withdraw all your 401(k) assets now (as a cash distribution)You can use the cash for immediate needs.Your money loses its tax-deferred status.

Your distribution is subject to a mandatory 20% income tax withholding (your actual tax may be more or less) and may be subject to a premature distribution penalty (10%) if you are below age 59½. (Exception: Participants who terminate employment in the year they turn 55 are exempt from the premature distribution penalty.)

You lose out on future growth opportunity.

The tax rate you pay on the distribution could be higher than if you spread the distribution over multiple tax years.
This table does not address your options for a Roth 401(k) or Roth IRA. Homestead Funds does not offer legal or tax advice. Please consult the appropriate professional regarding your individual circumstance.

Convenient Transactions

At Homestead Funds, it’s easy to add to your account, sell shares from your account, or exchange from one fund to another.

Add to or exchange shares by phone, online or by mail. Transactions within your IRA are not taxable, so you are able to reinvest dividends and capital gains, and exchange between mutual funds in your account without tax impact.

You can redeem shares by phone, online or by mail. Spousal consent is not required for account transactions, including distributions.

We strive to keep fund costs low

Homestead Funds’ philosophy is to keep fees and expenses as low as possible. With less money deducted from fund assets to cover operating costs, more of your money is working for you.

All Homestead Funds are offered at no-load, meaning no sales charge is deducted from your investment. There are no transaction fees. Additionally, our fund operating expenses for active equity and bond funds are in line with or below their peer group medians, as determined by Morningstar. Operating expenses cover the cost of running the fund and include investment management, accounting, legal and compliance services, record keeping and statement production. All mutual funds incur expenses.

Interested in rolling over a Homestead Funds Roth IRA?

Changes to the law allow you to roll over your 401(k) directly into a Homestead Funds Roth IRA.

Due to rising popularity in recent years, many employers have provided their employees with the option of making Roth (after-tax) contributions to their 401(k) plans. If you do have Roth 401(k) assets, rolling over to a Homestead Funds Roth IRA would provide you with the convenience and flexibility of an IRA while offering the continued potential for tax-free growth.

Additionally, Roth IRAs are not subject to mandatory Required Minimum Distributions (RMDs) at age 72 while Roth 401(k)s are. Even if your 401(k) contributions were made on a pre-tax basis, a Roth IRA may be worthy of your consideration. Changes made to tax laws in 2009 removed the income limitations for processing a conversion of your pre-tax 401(k) to a Roth IRA. Please be aware you will need to pay any taxes associated with a conversion.

Taxable amounts in the 401(k) must be reported as taxable income for the year of the direct rollover to the Roth IRA.

Also, beginning in 2010, the rule against conversions by people who are married filing separately no longer applies.

Please be aware that the five-year rule regarding tax-free distributions is separate from the 401(k), so you will want to have a Roth IRA established at least five years before taking distributions.

Use the right Homestead Fund for your goal 

When you  open an account with Homestead Funds, make sure to select investment options that are appropriate for the task. For example, assets earmarked for use in the near future should be invested in funds suitable for a short time frame, while retirement assets should generally be invested in funds suitable for long-term investment. 

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