You are leaving your employer for bigger and better things and now have to figure out what to do with that 401(k) account. Your retirement account probably has been on autopilot and you haven’t given it much attention until now. So what do you do with your hard-earned retirement money? Well, you essentially have four different options with benefits and drawbacks: stay in the plan, cash out, roll over into new 401(k), roll over into IRA. It is up to you to decide what is going to be the most appropriate option or seek help from a professional such as a financial advisor.
The first step is making sure you can do a rollover. You need a triggering event such as leaving your employer or turning 59.5. Next, to roll into an IRA you need to have an IRA account. If you haven’t done so you need to choose a financial company to provide you the IRA account. The next step is initiating the rollover. Get in touch with the 401(k) provider and ask to do a direct rollover. Most of the time you can initiate it online. However, sometimes a form is involved. Expect an extra step if you are moving a large amount of money; financial institutions will usually require a signature guarantee.
Most of the time this would be initiated with the company that holds the old 401k and it is the same steps as rolling into an IRA. A rollover form or online account will get you going. Sometimes just a simple phone call can do the trick as well. Don’t get tripped up some companies require their sign-off on the rollover for a variety of reasons this can increase the duration for the rollover to finish.
The majority of the time you can stay within the old employer 401k as long as you meet the minimum balance (usually around 3k). No additional contributions can be added but your money can continue to grow with the market according to the investments you have chosen. It is a common misconception that fees will go up when you leave an employer, which only occurs in rare circumstances.
You may want to stay in the old 401k for a few reasons. You consider the investment lineup better than the new 401k. Or you are repaying back a loan on the 401k. If there is the possibility you will eventually return to the company then stay with the plan. Another reason would be if the investment cost is lower than what you can find outside of the 401(k). This use to be a bigger deal but with the advent of ETF’s there isn’t much difference and there may even be cheaper investments outside of the 401(k). The final reason would be perks with the old 401k that you wouldn’t get with an IRA or the new 401k such as free robo-advising.
While it may be tempting if you are in a financial crunch, this is one of the worst options especially if you are under the age of 59.5. It should only be considered during extreme situations such as keeping a roof over your head or food on your table. There would also be a deep need to further examine your financial behavior and get help if you find yourself in this position. If you cash out and are under the age of 59.5 you will face a 10% penalty on top of ordinary income taxes. Here is the additional kick in the stomach most likely you are in a higher tax bracket if you haven’t retired yet defeating the point to retirement accounts. There are exceptions to the 10% penalty check out the IRS website to find out more.
Now if you are retired you may be ready to take money out and that is great, you saved it for this period of life, however, do it smartly. Come up with a distribution plan that helps you efficiently withdraw your 401(k) savings. A lump sum is rarely the best move.
It is a very individualized answer for each investor. It would be best to consult a financial planner or advisor. If you are a DIY investor, carefully look at the options and make a pros and cons list for each option.
Things to consider would be as follows.
Answering these questions will get you started in answering the question, “what to do with your 401k after leaving a job?”.
If you have a sizeable portion in employee stock, then it is imperative to talk to an accountant or tax advisor. Even if you don’t have a sizable account there still may be tax implications if you choose to sell the stock. If you believe in your old company and think the stock will appreciate you may want to keep your shares. Don’t have faith in your old company? Then you may want to sell the shares just be aware there may be tax implications.
Okay, that was the quick and dirty run down about what to do with your 401k after leaving a job. Spend time analyzing the best option for you. Don’t be that person that just assumes it is best to roll into your next employer’s retirement plan. Also, don’t be the person that does nothing.
Still can’t figure it out? Don’t want to spend the time looking into the details? Sign up to chat with a financial advisor. Your financial partners at BlackBird Finance based out of Pagosa Springs will strategize with you and work virtually. Book a time to chat about areas you could use financial help.