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Not Sure What to Do with Your Old 401(k)? Here are some options…

Not Sure What to Do with Your Old 401(k)? Here are some options…

| February 17, 2022
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You’ve worked hard and you’ve saved money away in your company’s 401(k) but now it’s time you moved on.

One common question when leaving a job is what to do with the old retirement plan. Regardless of why you’re leaving your current job, you need a plan for your former employer's retirement savings plan.

 

Because your employer-sponsored retirement plan may be a large portion of your retirement savings, it's important to know your options and weigh the pros and cons of these options to find the choice that makes the most sense for your situation. One wrong move can cost you a big chunk of your savings which is why you need to be informed and ready to make the right move.

You essentially have four options to choose from: keep your old 401(k) where it is, roll over your 401(k) to an IRA, roll over your old 401(k) to your current 401(k), or cash out your retirement plan.

 

Option 1: Keep your plan with your former employer.

Advantages:

  • Your money has the chance to continue to grow tax-deferred
  • If you are 55 or older and you leave your job, you can take penalty-free withdrawals
  • Many employer-sponsored plans offer lower-cost or unique investment options
  • Federal law provides broad protection against creditors

Considerations:

  • If you have less than $5,000 in the account, you may be forced out of the plan
  • You won't be able to add any more money to the account or take a 401(k) loan
  • After age 72, you'll have to take annual required minimum distributions (RMDs)

 

Option 2. Roll over into an IRA.

A Rollover IRA is a retirement account that allows you to move money from your former employer-sponsored retirement plan into an IRA.

Advantages:

  • Your money has the chance to continue to grow tax-deferred
  • If you're underage 59½, you can withdraw money penalty-free for qualifying expenses
  • You may be able to get a broader range of investment choices

Considerations:

  • After you reach age 72, you’ll have to take annual required minimum distributions (RMDs) from a traditional IRA (but not a Roth IRA)

 

Option 3: Roll over into a new employer's plan.

Not all employers will accept a rollover from a previous employer’s plan, so check with your new employer before making any decisions.

Advantages:

  • Your money has the chance to continue to grow tax-deferred
  • Having only one 401(k) can make it easier to manage your retirement savings
  • Many plans offer lower-cost or plan-specific investment options
  • You can defer RMDs even if you're still working after age 72

Considerations:

  • New plan rules may differ from your previous plan
  • Range of investment options available in the new plan may also differ

 

Option 4: Cash out your plan.

Taking the money out of retirement accounts altogether should be avoided unless the immediate need for cash is critical and you have no other options.

Advantages:

  • Immediate availability of cash

Considerations:

  • Withdrawing funds from your 401(k) is a taxable event, meaning the total amount withdrawn will be subject to income tax
  • Funds withdrawn will generally be subject to a 10% early withdrawal penalty — unless you stopped working for your former employer in or after the year you reached age 55, but are not yet age 59½

 

There are a few things to consider when making this choice, including your age, your plan balance, your investing knowledge, and the investment options in both your old and new retirement plans. Deciding what to do with your old 401(k), 457, or 403(b) plan is a very important decision that should not be taken lightly.

If you’re still not sure which option is the best fit for you, don’t hesitate to CONTACT US. Our experienced financial advisors can meet with you to review your current situation and help you choose the right option.

 

 

SOURCES:
https://www.forbes.com/sites/davidrae/2021/12/27/what-to-do-with-your-old-401k/?sh=4a70f511b1cd
https://www.fidelity.com/viewpoints/retirement/what-to-do-with-an-old-401k
https://www.prcurtman.com/blog/the-4-things-youre-allowed-to-do-with-your-old-401k
https://www.thebalance.com/what-to-do-with-an-old-401k-4097704

Prior to rolling over assets from an employer-sponsored retirement plan into an IRA, it’s important that you understand your options and do a full comparison on the differences in the guarantees and protections offered by each respective type of account as well as the differences in liquidity/loans, types of investments, fees and any potential penalties.

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