Starting a new job is an exciting time for you and your family and deciding what to do with your 401(k) at your former job most likely isn’t the first thing on your radar. However, it is important to weigh your options after you leave your job as the savings from your workplace 401(k) plan is most likely your largest retirement vehicle. There are four options with your 401(k) plan when you leave your job.
1) Leave your 401(k) at your previous employer.
In most cases, as long as you have $5,000 saved in your retirement plan you may leave it at your previous employer. The key is to look at the investment options made available to you are enough to create a diversified portfolio while also keeping your expenses to a bare minimum from the fund choices. Another important factor is to find out from your human resources department if the plan will start charging you a monthly fee as this can be the common generally after 1 year after leaving the company. Just like a Traditional IRA, you will be required to take Required Minimum Distributions at the age of 72 after leaving the workplace. One of the major benefits of keeping the plan at your previous employer is if you retired from your employer before 59 ½ but between the ages of 55-59 ½ as you can take penalty-free withdrawals that would not be available to you with a Rollover IRA until the age of 59 ½.
2) Roll over into an IRA
A rollover IRA is a retirement account that you can open at any of the major discount brokerage firms including Vanguard, Schwab, TD Ameritrade, or Fidelity and move the assets from your 401(k) into a Traditional IRA. Depending on your retirement plan at work, you may be limited to only a select few mutual funds and not eligible to invest in individual stocks or Exchange Traded Funds. This oftentimes is why rolling over your 401(k) to a Rollover IRA is the best option as you can pick from a wider range of investment options and control your fees by selecting low-cost index funds as well. The process generally involves a call with the custodian for your 401(K) plan and opening a Rollover IRA to the brokerage firm that you want to move your assets over to. The retirement plan administrator will then send the rollover check directly to your home or directly to the brokerage firm’s address with the Rollover IRA account number included on the check. If you decide to rollover your 401(k) to an IRA, make sure to use a trustee-to-trustee transfer (Direct Rollover) in which the check for the 401(k) balance is made payable to the custodian (e.g. TD Ameritrade FBO of John Doe) instead of made directly to you. The reason for this is you only have 60 days to complete the funding of your IRA from your retirement plan after the check is sent out from your previous employer’s retirement plan if made out to you.
3) Move to your new employer’s 401(k) plan
Some plans allow you to move your retirement plan from 401(k) to another. This is not always the case so you will need to check with the human resources department at your new job before completing the process. Just as it was important to review the investment options and fees of your previous 401(k) plan, it is more so the case when rolling over your 401(k) from your last job to your new job. The main reason for this is you may have been better off keeping your retirement account at your previous employer or moving the funds to a Rollover IRA. Once you roll your 401(k) into your new employer’s retirement plan, you are not allowed to move the funds out of the plan until you end employment so it is a very critical decision to make. This is often why it is not recommended to move an old 401(k) to a new 401(k).
4) Cash out the 401(k)
Just because this option is made available to you, doesn’t mean that it is a good option. In fact, if you are under the age of 59 1/2, you will not only pay ordinary income on the amount withdrawn but also a 10% penalty for an early withdrawal. The one exception for the penalty is if you are between the ages of 55 and 59 ½ and you stopped working at your employer to retire. After federal and state taxes and a 10% penalty, nearly 40% of the value of a premature withdrawal would be lost in the distribution received. The only time that you should cash out of the 401(k) is if you do not have any other ways to access funds and that all other resources have been depleted already.
Whether you decide to keep your 401(k) at your previous employer, rollover into an IRA, move to your new 401(k) plan, or cash out the proceeds ultimately depends on your own personal situation. Each option has its own benefits and disadvantages. If you have any further questions or concerns or need assistance in making a decision please give our office a call at 678-439-8866 or e-mail me and my firm, Mason Wealth Strategies, at ryan@masonws.com.