One of my favorite parts of my job is holding education meetings where I help employees eligible for their company retirement plan understand their options and prepare for retirement. Of all the questions I hear, one of the most common questions employees ask is “what should I do with my old 401(k)?” As with any financial decision, there are several options to explore, which include:
Consolidating your old 401(k) into your new employer’s 401(k) plan:
- Your retirement assets will be all in one place.
- You aren’t subject to taxes or penalties when rolling your old 401(k) into your new one.
- You can continue to make contributions to your retirement plan.
- You can take a loan from your 401(k), should you need the money.
- You can defer taking minimum distributions once you reach the age of 70 ½ if you are still working.
- You are locked into the plan investment options, which are can be more limited than the investment options of an IRA.
- You are locked into plan fees, which may be higher than other options.
Rolling your 401(k) into an IRA:
- You aren’t subject to penalties or fees when rolling your old 401(k) into a rollover IRA.
- You can continue making IRA contributions to your rollover IRA account.
- IRAs generally offer an increased variety for how your investments can be allocated than a traditional 401(k).
- An IRA provides the option to rollover your IRA into a Roth IRA. While you will be responsible for paying taxes on the assets you convert to a Roth IRA, you won’t have to pay federal taxes on the money you withdraw once you reach of age, which is an appetizing option for someone who anticipates moving to a higher tax bracket later in life.
- You cannot take a loan against your IRA should you need one.
- Once you reach 70 ½ you will be required to take minimum distributions, even if you are still employed.
With this option you can receive a check for the funds that are currently in your plan. While it might sound tempting to receive a check for the amount of funds in your account, I advise people to not consider this an option, unless there are extenuating circumstances where you desperately need the money.
- If you are younger than 59 ½ you will be subject to the 10% early withdrawal penalty, as well as income taxes on the money withdrawn.
It’s also important to keep in mind that with any of the above options, if you have previously taken out a loan on your 401(k) you will have to pay back the loan back or also be subject to taxes and a 10% penalty on the funds you borrowed.
Another option is to keep your assets in your former employer’s fund if the plan allows for it and you are eligible, although you may be charged a service fee if you are no longer contributing to the plan.
Before making a decision, it’s vital to educate yourself on the options and types of plans available to you, weighing the pros and cons while considering your age, financial situation and plan details. It’s always hard for me to hear when older employees have taken the option to cash out an old retirement plan because they weren’t aware of other options, consequently losing a big chunk of the money they had worked so hard to save. To ensure you are on the right path to live the life in retirement you have envisioned, consider speaking to an advisor who can help you determine the best scenario for you.