Planning matters

401(k) Rollover Considerations

A common question from our clients is what to do with an existing 401(k) account when changing jobs – leave it? Roll it? Convert it? Let’s look at 5 different ways you can handle the money you’ve accumulated in your employer-sponsored 401(k) plan after you no longer work there.

1. Leave it in your current 401(k) plan

If your current employer allows it, one option is to leave your money where it is. Although you won’t be able to contribute or borrow against the plan after you separate from service, this is often the simplest thing to do – no forms or decisions are needed – but there are a couple of things to be aware of. Number one, check to be sure the plan provider isn’t charging a fee because you’re no longer an employee. And number two, make sure you keep good records, so the funds don’t get lost or forgotten over time. This is especially important if you have changed jobs frequently during your career, accumulating pots of money at several employers over the years.

2. Roll it into your new 401(k) plan

If your new employer offers a 401(k) plan with attractive costs and features, and the plan allows incoming rollover transfers, you may want to roll over your old 401(k) to the new company plan. Keep in mind that even if your old and new 401(k) plans include similar holdings, you’ll need to liquidate your current plan and reinvest them in your new 401(k) plan investment offerings. Work with the 401(k) administrator at your new company to coordinate this type of rollover to ensure a timely and tax-free transfer.

3. Make the move to a traditional individual retirement account (IRA)

Moving your 401(k) funds into an IRA will give you ownership directly. As the owner of the IRA, you can choose to invest the funds in a wide array of investment options, without being limited to the funds available in the 401(k) plan. And if you change jobs again, you won’t have to worry about making changes or moving the account. If funds have been correctly rolled into an IRA, they will still be eligible for a future rollover into a 401(k) plan, should you choose that course in the future.

 4. Covert into a Roth IRA

Depending on your individual situation, you could consider converting your 401(k) plan to a Roth IRA where withdrawals are entirely tax-free in retirement, provided you’re over the age of 59½ and have had the account for 5+ years. Because you would need to be prepared to pay taxes on your existing 401(k) funds at the time of conversion, consult with your financial planner or tax advisor to understand the impact of this decision.

5. Cash It Out

While it may be tempting to take this option, it can be the most expensive decision of the five. Unless you qualify under an exception, or are age 55+, funds withdrawn from a 401(k) plan are subject to early withdrawal penalties and a mandatory 20% federal tax withholding rate (plus state tax, if applicable). Unless the 401k balance is very small, or your tax bracket is very low, you could end up with an unwelcome surprise at tax time.

 

There are so many individual circumstances that come into play when figuring out what to do with a 401(k) plan. Our financial planners can help you look at your options, and partner with you to make more informed decisions to reach your goals.

 

Written By Johnson Bixby