What Should I Be Doing With My Old 401k?
Have you ever thought about changing jobs?
The vast majority of people will change jobs multiple times before they fully retire, with the average person working 12 different jobs throughout their life. But, do you know what happens to your employer-sponsored retirement plan if you leave? If you didn’t know, things like 401(k)’s & 403(b)’s are yours to keep and do with what you please - depending on your company’s vesting schedule. That money belongs to you, but with special fees & taxes for early distribution (before age 59.5) you have to be careful what you do with that money after you leave your company.
When we talk about changing jobs and moving your retirement savings there are 4 things you can do with that money. I’ll go through each of the options and explain some pros and cons of each.
The first option is that you can leave the money in your former company’s 401(k) plan. This will be the default if you don’t do anything. Some people will even forget they have money in a 401(k) when they leave the company and it will sit in these plans until they remember.
Pros:
Continued tax-deferred growth
No tax consequences
Have the ability to move this money to another plan later
Cons:
Limited to the 401(k) plans investment options
Usually very limited with basic, simple investment options
The plan may have account minimums to remain in the plan
May not be eligible to keep the funds there
Cannot take a loan against an old 401(k)
The second option is to roll over your old 401(k) into your new company’s 401(k).
Pros:
Continued tax-deferred growth
Avoid early withdrawal penalties
May be able to take a loan from the total plan value
Cons:
Limited investment options
May have limits on how you move your money between the investment choices in the plan
The third option is to roll it over to an IRA. This consists usually of hiring an advisor like myself to manage these funds and provide services to you and your family regarding your entire financial situation.
Pros:
Continued tax-deferred growth
Avoid early withdrawal penalties
Have virtually unlimited investment options that fit your specific needs
Consolidate retirement assets into one place
Have the opportunity to hire someone to provide investment management & comprehensive financial planning
Cons:
Cannot borrow against your IRA
Fees can sometimes be higher but adding professional advice and guidance may be worth it to investors.
The fourth & final option is to take a distribution in cash. Like I said at the beginning, this money is yours. You can do whatever you want with it, including cash it out and spend it, however, I haven’t seen any situation that this would make any sense. This is because the cons far outweigh the benefit of having cash now.
Pros:
Having cash in your pocket now
Cons:
If under 59.5, 10% early withdrawal penalty
Your entire distribution will be taxed both federally and by your state (if your state has an income tax)
Could owe a mandatory 20% federal withholding tax
No more compound growth if not reinvested.
As you can see, you would likely want to use one of the first 3 options for yourself - especially if you are under the age of 59.5.
Which option is right for you? That all depends on your situation, and your overall financial plan. So before you do anything, consult your financial professional to see which option is right for you. Any questions? Give me a call, I’ll be happy to help.
Will
This blog was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material.