Key fact:  According to the Pew Research Center, beginning on Jan. 1, 2011, the oldest members of the Baby Boom generation turned 65 years old.  On that day and for every day for the next 19 years, 10,000 baby boomers will reach age 65.

Age 65 is the most common age associated with retirement.  Baby boomers are retiring at various ages but regardless of what age each individual baby boomer retires, another key fact is that thousands of baby boomers are retiring each year and will be doing so for approximately another 14 years.

And one of the most common dilemmas facing baby boomers as they retire is “what do I do with my 401(k)?”  Generally, there are three options – keep the assets in the plan; roll the assets over to an Individual Retirement Account (IRA); or take a distribution of the plan assets directly or some combination thereof – with several nuances to consider as you make your decision.

Let’s dispense with the easy option first – take a distribution of the assets directly.  For the majority of people, this option is a bad choice.  You have saved for years on a pre-tax basis with the purpose of supporting yourself in retirement.  Taking a full distribution as soon as you retire creates an immediate and sometimes large tax burden, depending on the size of your 401(k), and essentially defeats the purpose of your saving efforts over the past several years or decades.  You may want to take out a small portion to treat yourself to a retirement gift such as a new car or an extended vacation but generally, this is a poor choice.  Also, keep in mind that if you retire before age 59 ½, you may incur penalties in addition to the aforementioned tax liability by taking a distribution of your 401(k) funds.

So, the real decision comes down to whether you should keep your assets in your former company’s 401(k) plan or “roll over” your plan assets to an IRA.    When considering this decision, several factors should be considered:

• Investment Choices: Is the breadth of investment options available to you within your company’s 401(k) plan sufficient to build a well-balanced retirement portfolio?  According to research from the Investment Company Institute and BrightScope, the average 401(k) plan offers 25 investment choices.  However, many plans have significantly fewer choices.  Also, does the investment line-up include alternative investments such as real estate investment trusts (REITs), managed futures, and master limited partnerships (MLPs)?  These and other investments that are non-correlated with both the equity and bond markets and can be necessary in various economic conditions to build a portfolio that can both grow and sustain itself in a declining stock market environment.  How about different flavors of fixed income investments?  Depending on the prevailing interest rates and the direction of the Federal Reserve interest rate decisions, many fixed income funds are inappropriate.  Remember, when interest rates rise, the value of bonds decline.

• Fees: What are the fees charged by the company plan?  There are mutual fund management fees and plan administrative fees to consider.  Often times, the company plan picks up the administrative fees.  The plan’s fee arrangement details should be disclosed in either the 401(k) summary plan description or the annual report.

• Active Management: How forward looking and effective is the individual or committee that oversees the investment line-up?  Do they consistently evaluate the performance of the current funds and remove underperforming funds?  Are key criteria like the size of a small-cap fund or whether a manager has been true to his stated style considered?  Is there a balance between the quality of the fund and the associated fees or are quality funds eliminated simply for the sake of finding the lowest fee fund in the category? A high quality wealth management firm will consider all these factors when building out a client portfolio along with providing many other services that may be of value.

• Investing Knowledge: How savvy of an investor are you?  Do you have the knowledge to sift through the investment options in your 401(k) and build an appropriate portfolio for yourself?  Many 401(k) line-ups now have a bevy of target date funds in which your assets can be invested.  Using these types of funds typically allow you to make the investment and forget about the asset allocation decision, as it’s done for you.  However, keep in mind that target date funds are often invested very conservatively, even given relatively long time horizons.  Given the long retirements that many of us will have the privilege of experiencing, a significant growth component still needs to be part of your investment portfolio in order to avoid the possibility of outliving your assets.  Hiring a professional wealth manager who is skilled at building an appropriate portfolio for you via an IRA rollover, and who takes the emotion out of investment decisions might be a better option for some people.

So, obviously the decision is not a simple do or don’t kind of dilemma.  Each individual should research their options before making a decision.  In fact, the Department of Labor (DOL), which is responsible for ensuring the integrity of employee benefit plans, has issued a new rule affectionately known as the “DOL Fiduciary Rule”.  The rule mandates that retirement advice given by financial advisors to individual investors as it regards the rollover decision be in the best interests of the client.

Regardless of your final decision, there are also some key strategies that should be considered:

• Substantially Equal Periodic Payments (SEPP) – if you happen to be so fortunate to retire before the age of 59 ½, you could be subject to a 10% penalty on withdrawals from your tax-deferred accounts. This is especially critical for retirees who need to rely on their investments for income in retirement and whose life savings is inside their 401(k) or IRA.

One exception to the early withdrawal penalty is the Substantially Equal Period Payments (SEPP) plan, found in Section 72(t) of the IRS code.  Rule 72(t) permits penalty-free withdrawals from a qualified plan or IRA, provided the owner takes at least five annual substantially equal periodic payments (SEPPs).  The withdrawals are still taxed at the owner’s normal income tax rate.  If these distributions are taken from a qualified plan, not an IRA, you must separate from service with the employer maintaining the plan before the payments begin for this exception to apply.  The payments can be taken on a monthly basis as well, simply by dividing the annual amount by 12.  Anyone considering this option should consult your tax advisor before proceeding.

• Net Unrealized Appreciation (NUA) – many employees own company stock within their employer retirement plan. If you do, there is a tax break that could create a significant savings in how much you ultimately pay Uncle Sam.

Net unrealized appreciation or NUA is the difference between the price you paid for a stock, also referred to as the cost basis, and its current market value.  If this difference is significant and/or you own a large number of your employer’s shares, this strategy could be for you.

The strategy is relatively straightforward.  When you retire or separate from service, you would “roll out” your entire retirement account balance. It’s very important that the entire balance be distributed in the same calendar year.  All non-company stock assets are rolled into an IRA rollover account. However, the company stock would be “rolled” into a taxable account.  You would then own taxes on the cost basis of the company stock only, not on the amount of the gain since you first purchased the stock.  (If you are under age 59 ½, you may also pay a 10% early withdrawal penalty).  Then, when you go to actually sell your shares, you will pay long term capital gains tax on the stock’s NUA!  Any gain that is more than the NUA is a long-term or short-term gain, depending on how long you held the securities after the distribution into the taxable account.

Say you’re an executive considering retirement with a large number of company shares owned within your company’s 401(k) plan.  Here’s an illustration of how this strategy might work: