Changed Jobs? What to Do With Your Old 401(k)
A new job comes with a long to-do list: benefits enrollment, new logins, a new commute. The 401(k) you left behind rarely makes it to the top, so it often sits untouched for years.
That is understandable, but it is worth a look. The account is still yours and still invested, and what you decide to do with it can affect your fees, your investment choices and your taxes. Nothing about it is urgent, and there is no single right answer. This is a plain-English overview of your options and what to compare before you choose.
Your four options
When you leave an employer, you generally have four choices for the money in that plan.
Leave it where it is. Many plans let you stay put, though a plan may be able to move a small balance out on its own. You usually can't add new money, so it takes some attention to keep it aligned with your goals.
Move it to your new employer's 401(k). A direct transfer keeps everything in one place. Plans aren't required to accept rollovers, so check with HR first.
Roll it into an IRA. An IRA typically offers a wider range of investments and makes it easier to combine several old accounts. It also comes with different fees, services and protections than a 401(k).
Cash it out. This is usually the most expensive choice. The withdrawal is generally taxed as income, and if you are under 59½ there may be an additional 10% tax, with some exceptions.
What to compare before you decide
The right answer depends on the details of the old plan and the alternatives. These are the points worth lining up side by side.
Fees and expenses. Look at plan administration fees, the expense ratios of the funds you hold, and any account fees on an IRA.
Investment choices. Compare what each option actually lets you invest in, not just how many choices there are.
Services. Some plans offer planning tools, advice or loan features that an IRA does not.
Legal protections. Protection from creditors can differ between a 401(k) and an IRA, and it varies by state.
Withdrawal rules. If you leave your job in or after the year you turn 55, you may be able to take penalty-free withdrawals from that employer's plan, which is not the case for an IRA.
Required minimum distributions. The rules can differ depending on where the money sits and whether you are still working.
Employer stock. If your old plan holds company stock, there may be special tax treatment. Check before moving it.
Roth money. Roth and pre-tax balances are treated differently. Moving pre-tax money into a Roth IRA is a taxable conversion.
Mistakes worth avoiding
Most of the costly errors are about process, not strategy.
Taking a check made out to you. Ask for a direct rollover, where the money goes straight from one account to the next. With an indirect rollover, the plan generally withholds 20% for federal taxes, and you have 60 days to deposit the full amount into a new account or the rest becomes taxable.
Cashing out "just for now." A small withdrawal today can mean taxes and penalties, and the money stops growing for retirement.
Overlooking a 401(k) loan. An unpaid loan balance may come due or be treated as a taxable distribution after you leave.
Losing track of the account. Keep a list of old plans, and update your address and beneficiaries with each one.
A simple way to decide
Three questions cover most of it:
Does your new employer's plan accept rollovers, and are its costs and investment choices good?
How do the old plan's costs, options and special features compare?
Would you rather have one account for everything, or keep things where they are?
If the answers aren't clear, there is usually no rush. Take the time to compare, and make sure whatever you choose is a direct transfer.
If you would like a second set of eyes on an old plan, I am glad to talk it through. You can reach me at 609-647-5238 or gkorngut@osaicwealth.com.
Greg Korngut, Osaic Wealth
This article is for general educational purposes and is not tax, legal or investment advice. Whether to keep, move or roll over retirement assets depends on your individual situation, so consider consulting a qualified professional. Securities offered through Osaic Wealth, Inc., Member FINRA/SIPC.
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