When you decide to leave or retire from AbbVie, you will have to make important decisions about what to do with your 401(k) plan. Employees who retire or leave a company regardless of their age or reason should consider their options for their 401(k) plans. If you find yourself in this situation and you have an AbbVie 401(k) plan, then you have several options on how to handle your retirement savings. In this blog post, we'll look at what those options are and what's best for your financial future.
Option 1: Leave Your 401(k) in the AbbVie Plan
If you have more than $5,000 in your AbbVie 401(k) account, you have the option to leave your money in the plan. This can be a good option if you're happy with the investment options offered by AbbVie's plan. However, you'll need to remember that you won't be able to make any additional contributions to this 401(k) account, and you'll likely still pay fees associated with the plan. Additionally, if your account balance is less than $5,000 and you don't make a choice about what to do with your funds, your account may be automatically rolled over into an IRA with a third-party provider.
Leaving the 401(k) alone can be helpful for some people, especially as there are some unique rules associated with 401(k)s. If you’re age 55 (or older) when you leave the company, you can take withdrawals from this account even though you are under age 59.5. Additionally, you may also need to keep the account open if you are expecting matching or profit-sharing contributions to be made to your account in the following months.
Option 2: Roll Over Your 401(k) to an IRA
Another option to consider is to roll over your 401(k) plan to an Individual Retirement Account (IRA). This can be a smart move if you're looking for more investment choices than what AbbVie's plan offers, or if you're looking to reduce the fees you're paying. A rollover is not a taxable distribution – you can move your savings into a new account without paying any taxes. Plus, you can choose to invest your money in a wide variety of stocks, bonds, funds, and other assets, depending on the IRA provider you choose.
This option is helpful if you’re finding yourself with a lower income and have a lot of your savings in tax-deferred accounts. In the following years, you could be able to take advantage of Roth conversions, which is where you take withdrawals from your IRA, pay taxes on the withdrawal, and move the money to a Roth IRA. This allows this money to be saved for later in your retirement and used in a tax-free manner. By doing this conversion now in years where your income is lower, you’ll find that you may be paying less in taxes than you would be if you wait ed to withdraw the money from an IRA later.
If you’re under age 59.5 and roll your AbbVie 401(k) to an IRA, you are not usually able to access your money without penalty until after that age. There is one main exception and that’s if you need access to the money and would be open to an income stream for 5 years. This is called a 72(t) election, and it can provide you penalty-free income (there’s still taxes owed on withdrawals), and the IRS will determine how much needs to be paid out each year. It typically follows set guidelines but can be akin to the RMD formulas that you find when being required to withdraw money at age 72. There is a mandatory time limit of 5 years or until age 59.5 (whichever is longer), and the decision is irrevocable, so be sure to do some research with an advisor like me before signing this paperwork.
Option 3: Cash Out Your 401(k) Plan
Finally, you may be considering cashing out your 401(k) plan when you retire or leave the company. Before you do this, consider the long-term costs. Cashing out a 401(k) account will create a taxable event. If you are under 59 and a half years of age, you will also face a 10% penalty. Furthermore, you'll be taking away retirement money that could be working and growing for you until you need it. Unless you have no other options, cashing out is not a recommended course of action, as it could significantly reduce your retirement savings and future income.
I typically don’t recommend this option to many people, even if the account balance is small. Paying taxes and penalties versus filling out some simple paperwork to move the account is not a smart plan of action.
Deciding what to do with your AbbVie 401(k) is an essential step in planning for your retirement. It's essential to know your options to make the best decision, whether that means keeping your money in the AbbVie plan, rolling over to an IRA, or cashing out. You worked hard to earn and save your retirement funds, and it's essential to make sure you're using them wisely to support your future financial stability and goals. Before making any final decisions, speak to a financial advisor or tax expert who can help you weigh the pros and cons of each option so you can make a sound decision.