During the financial planning process, we are often asked about what to do with an old 401(k) account. Whether you are ready to retire or starting employment at a new company, there are situations that will require you to weigh your options regarding your old 401(k).
Let’s look at the four basic options.
Roll the plan over to an IRA
Advantages:
- Rolling your plan to an IRA will allow continued tax-deferred growth potential while providing you with a wide range of investment options, that may include mutual funds, bonds, individual securities, and ETFs.
- As a retiree, an IRA can offer you more flexibility and access to your funds than a 401(k) plan.
- If you are under age 59-1/2, there are some situations that allow distributions without the 10% penalty (ex. First time home buyer).
Considerations:
- It’s important to work with an experienced financial advisor who can guide you through the multitude of investment choices available, and review the fees and expenses associated with an IRA. Fees vary between providers.
- If you are 72 or older, you will be required to take a required minimum distribution (RMD) from your IRA each year.
Roll the plan over to your new company’s plan
Advantages:
- This option allows you to consolidate your 401(k)s into one account.
- You can continue to make tax-deferred investments according to the rules of the new plan.
- With a direct transfer you will avoid paying taxes or an early-withdrawal fee.
- Most 401(k) plans have a provision that allows for short-term loans for serious liquidity needs.
Considerations:
- Be sure to compare the investment options, and the administrative and investment costs of the new and old 401(k) plan.
Leave your account where it is
Advantages:
- Some companies allow you to leave your 401(k) account in their plan if you retire or change jobs. This can be beneficial when you prefer the investment options in your former employer’s plan.
- If you’re not ready to decide what to do with your account, leaving it in the current plan will allow you time to explore your options.
Considerations:
- There may be a minimum balance required (typically $5000) and you will not be able make additional contributions.
- If you were receiving a company match on your contributions, this will likely cease.
Cash out of your existing plan
Advantages:
- The only reason to cash out your 401(k) is to provide immediate cash in a situation where you have no other options for obtaining the funds you need.
- In most instances, we would consider this as a last resort to help alleviate extreme cases of financial hardship.
Considerations:
- By exercising this option, your money won’t have the potential to continue growing tax deferred.
- Any cash distribution will be subject to state and federal taxes and if you withdraw before age 59-1/2, you may be subject to a 10% withdrawal penalty.
Deciding what to do with your old 401(k) is not a decision that should be rushed and something you will want to discuss with your financial advisor and your accountant. Your individual tax and financial situation and your retirement goals should be thoroughly explored before you make a decision. For more ideas and information on managing your retirement accounts, call the Knox Grove Team at 609-216-7440.