By Kristi DeRycke, Registered Assistant
Have you left a job for a new adventure and left a 401k behind?
Or maybe you are thinking about switching jobs and currently have a 401k at place of employment?
If you fall into either of these categories I want to first congratulate you and wish you best of luck! You have a lot to think about now as you are adjusting to a new job. I hate to add one more thing to your plate, but you have one big decision that has to be made. What are you going to do with your 401K at the previous employer? The money that you contributed to the 401K is all yours. The amount that your employer matched may all or partly be yours as well. Companies have various vesting policies. This means how long you must work for the company to get the money that they kicked in to your 401K. For instance, a business may have a 5 year vesting policy. After your first anniversary or so many hours worked you are entitled to 20% of the amount they put in if you leave. After the second completed year, you are entitled to 40% of the amount they invested. This continues until you complete 5 years when you are entitled the full amount that they contributed. The vesting schedules vary greatly between companies so check with your Human Resources Department or company 401K website.
Bottom line is that you have money that is now sitting in a 401K at a job that you have chosen to leave.
Option 1: Cash out the money in the retirement account. This will mean that you cash out all that money that you had saved for retirement. You also may incur a 10% penalty on top of the taxes you will have to pay on the money that was previously in a tax-sheltered 401K. The money would be taxed at this point as it was taken out before retirement.
Option 2: Depending on the amount and the company, you may be able to leave the money in the old 401K but is that the best solution for you?
- Do you want to leave your money with a company that you are no longer connected to?
- Be certain that you can actually leave it in the old company. Check with your old company to see what the benefits and penalties would be to leave it sit.
- Is there a minimum amount required in a 401K to leave it at the old company? Some companies will kick out the money to you if you haven’t worked to move the money and it is under a certain amount. This could cause some penalties and tax implications if the check is written directly to you versus another investment company.
- Make certain to update any address changes to your old company if you move in the future.
- Monitor your old 401K to be certain your mix of assets still matches your risk tolerance.
- Monitor your old 401K to be certain your money is in lower fee options and in the funds that you want. The funds available may change over the years.
Option 3: You may be able to roll your old 401K money into the 401K at your new job.
- Be certain that you like the investment options in the new 401K. 401K plans are notorious for having very few options to invest. There may be some target date options and a few investment funds in each category (i.e. Large cap growth, large cap value, mid cap, bonds, etc.).
- Also make certain that you understand the fees involved with your new 401K. 401K plans have been getting better about disclosing fees and offering lower cost options within the plan but still can offer accounts with high fees.
- You will be required to take out a minimum distribution at 70 ½ even if you are still working.
- You may or may not be able to move it to an IRA later if you moved it once to the new 401K unless you move jobs again.
Option 4: Roll the old 401K into an IRA*
- IRAs have many different investment choices in each category like small cap, large cap, bonds, etc. You can choose funds that are right for you and look for options with lower fees.
- You will not pay any penalties on this rollover and future earnings will continue tax deferred.
- You would have more control over your money and what investments/funds to put them in.
- You can leave your new job sometime in the future and roll that 401K into the same IRA for simplicity now and at retirement.
- You will be required to take Required Minimum Distributions at 70 ½.
Option 5: Roll the old 401K into a Roth IRA
- If your plan allows it you may be able to move your 401K into a Roth IRA. You would have to pay taxes on the 401K at that time but then future earnings will not be taxed on growth or at time of withdrawal. If your current 401K is a Roth 401K then you would not be taxed to move to a Roth IRA.
- You can withdraw the money if it has been in for at least 5 years and you are 59 ½ years of age penalty free.
- Some of the money in a Roth can be taken out for a first time home purchase or higher education expenses prior to 59 ½ as long as it has been in for 5 years.
Caution: If you choose a rollover, be certain that you have the old company write a check directly to your new 401K plan or IRA plan if you decide to go this route. This is called a direct rollover and is the simplest way to be sure you are not penalized or taxed on that money. If your old company writes you a check directly with the balance of your 401K, they are required by law to take out 20% for taxes. This is called an indirect rollover. The government considers it a loan. You then have only 60 days to put the money in a new 401K plan or IRA (Roth or traditional). The difficult part is that you would have to come up with that 20% in addition to the 80% sum that was in the check to repay what the government considers a loan from you 401K and it has to be done in that 60 days.
Please know that if you want guidance, we can help! We fully understand your options and can assist with any questions that you have.
By Greg Johnson
There are plenty of choices and understanding the pros and cons of each option is very important. Working with a financial advisor to make the right decision is very important. One of the key factors I always bring up is control of the investments. Do you want to have a say in the investment options you are given? Most 401k plans don’t go to their employees and ask for their permission to change funds. Do you need to take withdrawals prior to 59 ½? Most 401k plans will allow you to do that without an early withdrawal penalty as all IRA’s will not. Do you want someone to help you review your account on a frequent basis? Most 401k plans come with a customer support center that can give you information on your account, but cannot give you advice. All of these are factors that you will want to consider before making your final decision. We are here to help, so take the time to visit with a professional and make the decision that best fits you.