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401(k) Plans in Mergers and Acquisitions

If your company is in the process of an acquisition or merger, a retirement account may be the last thing on your mind. After receiving this new (and potentially life-changing) information, an immediate thought might be job security, department re-orgs, or your existing equity that you’ve grown to adore. 

However, tax-advantaged savings absolutely require attention, given the long-term impact they can have on your financial situation, and the various options that become available. In this article we will explore the options for a 401(k) plan that is being terminated, as well as the advantages and disadvantages of each. 

401K Roth Ira

What are my options and what are the key considerations of each? 

There are four key options available for a plan that’s being terminated. Please keep in mind that although each option has advantages and disadvantages, it is important to optimize for your objective in making the decision – whether it be tax efficiency, low maintenance investing, or flexibility. 

Transfer 401(k) balance to the newly available 401(k) plan (typically offered by the acquiring or parent company).

Advantages

Earnings in your 401(k) continue to grow on a tax-deferred basis (When distributions from the plan are made in retirement, you’ll pay ordinary income taxes on the full amount withdrawn, and if withdrawn before 59 ½ years of age, a 10% penalty fee will be incurred as well).

You may be eligible to borrow against the new 401(k) plan if loans are available (if a previous loan against your 401(k) was made, the balance carries over to the new plan). 

The new 401(k) plan may come with additional investment options.

Some employers (not common practice yet) offer self-directed 401(k) plans. Through a self-directed 401(k), you’re able to gain access to a very wide array of investment options (similar to a Traditional IRA) while maintaining both the higher annual contribution amounts and employer match. This can be a very advantageous option for sophisticated investors, with the ability to invest in individual equities and sometimes even alternative asset classes (i.e. private companies, venture capital, or real estate), though it does require custodian approval on a per-deal basis if you don’t have a checkbook control (more on that in another post).

Disadvantages 

You may have a limited range of investment choices in the new plan, especially when compared to a self-directed IRA. 

Fees and expenses of the new 401(k) plan could be higher. 

Rolling over company stock may have negative tax implications. 

Roll your 401(k) plan into a Traditional IRA

Advantages

The balance continues to grow on a tax-deferred basis (same as 1.a.i above). 

Broad array of investment options (i.e. any stocks, ETFs, mutual funds, or other investments available through your chosen broker-dealer) when compared to 401(k) plan. 

Many Traditional IRAs are now offered with no ongoing expenses and little to no trading costs associated with the account. 

Options to invest in alternative asset classes, such as venture capital, hedge funds, real estate, and cryptocurrency funds, through services such as AltoIRA.

Several tax-deferred retirement accounts can be consolidated into the same IRA, making management easier. 

Disadvantages

You can’t borrow against an IRA account, as you can with a 401(k), assuming the plan allows.

Rolling over company stock may have negative tax implications. 

RMDs (Required Minimum Distributions) start at 72 years old.

Roll your 401(k) plan into a Roth IRA

*Whereas a 401(k) is an employer-sponsored, tax-deferred account (any withdrawals in their entirety are taxed as income), Roth IRA’s are a self-directed and tax-free option (you pay ordinary income taxes on the full amount when converting into a Roth, or contribute annually with after-tax dollars). Principal and investment gains can ultimately be withdrawn on a tax-free basis at 59 ½ years old and beyond.

Advantages

The balance will grow on a tax-free basis (as with a Traditional IRA, distributions will be subject to a 10% penalty if made before 59 ½ years of age). 

RMDs are not required, as they are with a Traditional IRA.

Broad array of investment options (i.e. any stocks, ETFs, mutual funds, or other investments available through your chosen broker-dealer) when compared to 401(k) plan. 

Many Roth IRAs are now offered with no ongoing expenses and little to no trading costs associated with the account. 

Options to invest in alternative asset classes, such as venture capital, hedge funds, real estate, and cryptocurrency funds, through services such as AltoIRA.

Other retirement accounts can be consolidated into the same IRA, making management easier.

Disadvantages

You can’t borrow against an IRA account, as you can with a 401(k), assuming the plan allows.

Rolling over company stock may have negative tax implications.

Take a cash distribution

Advantages

Having cash and additional liquidity in the near term can help to satisfy any outstanding liabilities or other financial needs.

Disadvantages 

The amount of the distribution taken is fully taxable as income and a penalty of 10% applies if you are under 59 ½ years old. 

Money withdrawn is also subject to a 20% federal withholding rate.

The balance of this retirement account no longer grows on a tax-deferred basis.

Leave your balance in your former company’s plan (if permitted)

Advantages

No immediate action is required.

Earnings continue to grow tax-deferred until they are withdrawn.

Familiarity with the investment choices of the plan.

You maintain the ability to roll the balance into a new 401(k) plan or IRA account in the future.

A former employer may have lower fees and expenses than the new 401(k) plan.

You may be able to take a partial distribution or installment payments if permitted by the plan.

Disadvantages

Contribution eligibility to the plan expires. 

Your range of investment options may be limited.

You’re required to maintain another account, as opposed to consolidating with other retirement assets.

Fees and expenses may be higher than the other options expressed above.

Conclusion

The right option for you will be fully dependent on tax implications, liquidity needs, and investing objectives. While it is important to understand both the benefits and implications of the above options, most participants elect to either roll their 401(k) balance into a Traditional or Roth IRA account. The primary reasons being that you maintain or improve the tax-advantageous nature of the account (depending on personal situation) and available investment options broaden out significantly to individually-held stocks, ETFs, mutual funds, and even alternative investments (i.e. private investment funds, real estate, venture capital, and crypto-assets).

The content here is for informational purposes only, and should not be taken as investment advice. All views contained herein are my own and do not represent the views of any other organization.
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