“Early retirement” schemes are the new rage. These schemes purport to show you how you can cut your retirement planning time down by cashing out of a company retirement plan and making new investments that do not have the same restrictions on when you can start withdrawing the money (you must be 59.5 years old to start withdrawing from a 401(k) or traditional IRA). But watch out. These early retirement schemes are nothing more than another way to get your money.
Moving your company retirement plan into a brokerage IRA
Because there are certain instances in which you can remove money, penalty-free, from a Roth IRA before age 59.5, some shady brokers may try to get you to abandon your company retirement plan for a Roth IRA with their brokerages. This is a bad move. The approved withdrawals are specific, and your income may preclude you from eligibility for a Roth IRA. Often, the funds included in such switches are high-risk and result in high commissions for brokers, while not necessarily properly shoring up your retirement fund.
Watch out for Class B and C mutual funds
Another version of this retirement plan fiasco is taking your 401(k) and cashing it in so that you can invest in mutual funds. Although mutual funds can make up part of a retirement plan, just investing in them does not mean you are taking advantage of a retirement plan with the tax benefits offered through IRAs and 401(k)s. And many brokers put your cashed out money (penalties may apply) into Class B and C mutual funds which have higher fees. You should always avoid Class B and C mutual funds, no matter your investment strategy. So, while you can get at your money at any time (as promised), there are plenty of downsides.
Before making serious changes in your retirement planning, consult with an accountant or tax attorney. Changes in what investments are in your retirement portfolio usually aren’t a big deal, but cashing out of your company retirement plan is a big move. You should never make a decision that serious from information received solely from a free seminar (the preferred method of convincing employees to cash out). Also, pitches regarding “loopholes,” and especially “little-known loopholes” in any sort of IRS section or law should be carefully scrutinized.