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Independent Contractor With a 401K? 3 Critical Questions Answered

1)    What should I do with my 401k?”

I say, “It all depends on your situation, but you do have 3 options if you are an independent contractor with a 401k.”

  • a) Stay in your 401k:

If you are an Independent Contractor with a 401k and keep your 401k right where it’s at, like a lot of folks do when I meet with them at first, most are not aware of the possible downsides of this decision. First of all, you could be paying higher fees than need be . Over time, these fees can really add up!  Do you want to find out exactly what fees you are paying, and what you’re getting for those fees? (Click Here) and enter “Fees” into the Subject line for a Complimentary Analysis we provide for our readers. Secondly, your investment options are usually very  limited. You know how it was when you were working: “the union investment guy” came around every so often and you may have adjusted your investments to be more or less conservative.

With that being said, if you stay in your 401k plan, you most likely will not get individualized, constant comprehensive planning. 

  • b) Cash out your 401k.

If this is an option, many consider cashing out their 401k account, taking a lump sum distribution. This choice, on initial thought, could be quite tempting! You could do those renovations to your home that you have been putting off. Many of my clients tell me that they were so busy building/fixing other people’s homes that their own home became a bit neglected! Or, there is always that dream woodworking shop you always wanted in retirement. However, depending on the amount in your 401k, there could be serious tax consequences. You could end up handing over “Uncle Sam” a large portion of your account by not being aware of how taxes will affect this distribution.

Any other independent contractor with a 401k doesn’t want to be penalized by paying unnecessary taxes, and why should you? Also, once the money is spent, it is gone. You could be robbing your future self of the money needed years from now! 

  • c) Roll over your 401k.

Now, the more common option that independent contractors consider is to roll over their 401k into an IRA. In making this decision, you can be more in control of the fees that you are paying. You will have many more options as to how your money is invested. You will be more aware of the risks that you are taking. Choosing to roll over your 401k is usually the best way to get comprehensive individualized planning for the life of your retirement.

2)  Who is going to do the best job at handling my 401k?

I say, “ Find someone that speaks your language.”

Investment agencies seem like they are a dime a dozen nowadays, and it can get pretty overwhelming trying to choose one that will be best for you. Who do you turn to? Who can you trust with your entire life’s savings?

The first mistake most independent contractors make is consulting with an advisor who doesn’t specialize in helping them in their particular situation. The advisor could be great, but if she spends all her time helping middle aged folks invest during their working years and very little time with retired independent contractors with 401k’s, then she might not be best suited for you.

Many of your colleagues may consult with a generic advisor who doesn’t specifically work with contractors in retirement.

So what happens?

Often times, they get a few “cookie cutter” options a 30 year old is shown while still working. This is similar to asking your electrician to come over and fix your leaky faucet. He most likely will have some basic knowledge, but he wouldn’t have the same experience or specific knowledge as a full time plumber.

That’s why seeing an independent advisor who is able to show you a vast amount of options that are specific to your needs and goals in retirement is crucial. Many areas that can get overlooked include: reducing taxation, mitigating market risk, and creating a steady income stream taken from the appropriate accounts. Talking to an independent advisor can also help avoid some of the mistakes I’ve seen many of my clients go through with advisors who are captive, (meaning the advisor can only offer what their specific company has). I’d imagine you are like most people who would rather see a plumber for your faucet than an electrician, right?

 3)  Should I do anything to protect myself and my family against the costs of long term care?

 I say, “ This conversation definitely deserves your time and attention.”

 A study done by the US National Library of Medicine National Institutes of Health found the following: “Compared with white-collar workers, construction workers had increased odds of arthritis, back problems, chronic lung disease, functional limitations, work disability, and work-related injuries after controlling for possible confounders.” What does this mean for you? Although statistics on construction workers needing long term care may not be readily available, the above study does indicate that construction workers develop many of the reasons for needing long term care.

I’m sure you know of a few of the “old fellas” who spent some time in a nursing home: many of them had arthritis from years of physical labor, some had COPD from being exposed to different hazardous materials, another never fully recovered from falling from the scaffolding that one time… I’ve heard the stories from my clients!

The average cost for full on facility care is about $300/day, or close to $110,000 a year!  Can you imagine your entire life’s savings being drained that quickly? There are a lot of different options to protect yourself and your family against the cost of long term care, and it isn’t just “shelling out a ton of premium” for long term care insurance.  It is important to explore these options and have a plan in place, even if that plan does not include long term care insurance.

So, if you are an independent contractor with a 401k and would like further information on planning for or reevaluating your 401k, or simply want to chat, give Dylan Kennedy a call at our local Traverse City office at 231-421-7391

If you would like further information on planning for or reevaluating your retirement, or simply want to chat, give us a call at 231-421-7391.

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