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819 West 7th Avenue 
Spokane, WA 99204

Phone:

509-327-1171

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509-327-1181

 

WHAT DO YOU DO WITH AN OLD 401k?

Changing or leaving a job can be an emotional time. You're probably excited about a new opportunity—and nervous too. And if you're retiring, the same can be said. As you say goodbye to your workplace, don't forget about your 401(k) or 403(b) with that employer. You have several options and it's an important decision.

WEIGH YOUR OPTIONS

Because your 401(k) assets are often a significant portion of your retirement savings, it's important to weigh the pros and cons of your options and find the one that makes sense for you. You generally have four choices:

  • Leave assets in a previous employer's plan.
  • Move the assets into a rollover IRA or a Roth IRA.
  • Roll over the assets to a new employer's workplace savings plan, if allowed.
  • Cash out or withdraw the funds.

HERE ARE SOME THINGS TO CONSIDER ABOUT EACH

 

OPTION 1: KEEP YOUR 401k WITH YOUR FORMER EMPLOYER

Check your previous employer's rules for retirement plan assets for former employees. Most companies, but not all, allow you to keep your retirement savings in their plans after you leave. If you have recently been through a drastic change such as a layoff, this may make sense for you. It leaves your money positioned for potential tax-deferred investment growth so you can take time to explore your options.

The benefits of leaving your assets in the old plan may include:

  • Penalty-free withdrawals if you leave your job in or after the year you reached age 55 and expect to start taking withdrawals before turning 59 1/2.
  • Institutionally priced (i.e., lower-cost) or unique investment options in your old plan that you may not be able to roll into or hold in an IRA.
  • Money-management services that you'd like to maintain (Note that these services are often limited to the investment options available in the plan).

Some things to consider:

  • Typically, employers allow you to keep assets in the plan if the balance is more than $5,000. If you have $5,000 or less, you may need to proactively make a choice to remain. If you don't, some plans may automatically distribute the proceeds to you (or to an IRA established by you). 
  • You will no longer be able to make plan contributions or, in most cases, take a plan loan.
  • You may have fewer investment options than in an IRA and withdrawal options may be limited. For instance, you may not be able to take a partial withdrawal but instead may have to take the entire amount.

 

OPTION 2: ROLL THE ASSETS INTO AN IRA

Rolling your 401(k) assets into an IRA still gives your money the potential to grow tax deferred, as it did in your 401(k). In addition, an IRA often gives you access to a wider variety of investment options, such as annuities1, than are typically available in an employer's plan. You can also continue growing your retirement savings in a rollover IRA through IRA contributions to the account. Note, however, that in certain scenarios there can be benefits in keeping rollover amounts in a separate IRA.

If you have other accounts at a financial institution that offers IRAs, you often get consolidated statements. This gives you a more complete view of your financial picture, which may make it easier to plan and effectively manage your retirement savings. It's also easier to evaluate and manage your target asset mix if your investments are in one place. Make sure to research IRA fees and expenses when selecting an IRA provider, though. These fees vary greatly from firm to firm.

Of course, you need to weigh the costs and benefits of each approach. Managing a portfolio of mutual funds or ETFs yourself may entail far fewer investment expenses than buying a professionally managed lifecycle fund or managed account. However, if you do not have the time, investing skill, or interest in managing your own portfolio, you may be better off with a professionally managed account.

Other benefits of rolling over to an IRA may include:

  • The option of converting assets to a Roth IRA, which is a taxable event but provides federal tax-free withdrawals of future earnings, providing certain conditions are met2. (Note that your previous or new employer plan may offer a Roth workplace savings plan and allow participants to convert non-Roth assets into an in-plan Roth account).
  • Penalty-free withdrawals for qualifying first-time home purchase or qualified education expenses if you're under age 59 1/2.3
  • Investment guidance and money management services through a professionally managed account.

But take into consideration that:

  • After you reach age 70 1/2, you're required to take minimum required distributions from a 401(k), 403(b), or IRA (except for a Roth IRA) every year, even if you are still working. If you plan to work after age 70 1/2, rolling over into a new employer's workplace plan, or staying in the old one, may allow you to defer taking distributions.4
  • If you need protection from creditors outside bankruptcy, federal law offers more protection for assets in workplace retirement plans than in IRAs. However, some states do offer certain creditor protection for IRAs too. If this is an important consideration for you, you'll want to consult your attorney before making a decision.

A special case: company stock

If you hold appreciated company stock in your workplace savings account, consider the potential impact of net unrealized appreciation (NUA) before choosing between a rollover or an alternative. Special tax treatment may apply to appreciated company stock if you move the stock from your workplace savings account into a regular (taxable) brokerage account rather than rolling the stock (or proceeds) into an IRA. You may want to consider asking your financial adviser or tax accountant for help on how NUA may apply in your situation.

 

OPTION 3: CONSOLIDATE YOUR OLD 401k ASSETS INTO A NEW EMPLOYER'S PLAN

Not all employers will accept a rollover from a previous employer's plan, so you need to check with your new plan administrator. If your new employer accepts your rollover, the benefits may include:

  • Continuing to position your assets for tax-deferred growth potential.
  • Continuing to grow your retirement savings through contributions to your new employer's plan.
  • Combining plan accounts into one, for easier tracking and management.
  • Deferring minimum required distributions if you are still working after you turn age 70 1/2.4
  • Availability of plan loans (be sure to confirm that the plan allows loans).
  • Investing in lower-cost or plan-specific investment options, if available.
  • Broader creditor protection under federal law than with an IRA.

But consider this:

  • Your 401(k) may have a limited number of investment options compared with an IRA.
  • You will be subject to the new employer's plan rules, which may have certain transaction limits.

OPTION 4: CASH OUT

Taking the assets out should be a last resort. The consequences vary depending on your age and tax situation, because if you tap your 401(k) account before age 59 1/2, it will generally be subject to both ordinary income taxes and a 10% early withdrawal penalty. An early withdrawal penalty doesn't apply if you stopped working for your former employer in or after the year you reached age 55 but are not yet age 59 1/2. This exception doesn't apply to assets rolled over to an IRA.

If you are under age 55 and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.

 

A PITFALL TO AVOID

 

If you choose to roll over your workplace retirement plan assets into an IRA, it is important to pay close attention to the details. To be on the safe side, consider requesting a direct rollover, right to your financial institution. This is also referred to as a trustee-to-trustee rollover, and it can help ensure that you don't miss any deadlines. Why is this important? If a check is made payable to you, your employer must withhold 20% of the rolled-over amount for the IRS, even if you indicate that you intend to roll it over into an IRA within 60 days. If that happens, in order to invest your entire account balance into your new IRA within the 60 days, you'll have to come up with the 20% that was withheld. If you don't make up the 20%, it is considered a distribution, and you will also owe a 10% penalty on that money if you are under age 59 1/2. (Later, when you file your income tax return, you will receive credit for the 20% withheld by your employer.)

If you receive the proceeds check in the financial institution's name, you must deposit it into a rollover IRA.

 

WHAT YOU SHOULD CONSIDER WHEN MAKING A DECISION

It's important to make an informed decision about what may be a significant portion of your savings. As discussed above, your choice will depend on factors such as your former and current employer's plan rules and available investment options, as well as your age and financial situation. In addition, you may want to think about your investing preferences, applicable fees and expenses, desire to consolidate your assets, and interest in receiving investment guidance.

As you can see, you do have options for money left in an old 401(k). The good news is we can help you make the best decision for your retirement savings. Just follow the link below or call our office at (509) 327-1171 for more information or to contact one of our Advisors.



 

1. Traditional or Rollover IRA.
2. The new employer may impose a waiting period.
3. You may take penalty free distributions from a qualified employer plan if you terminate employment with the employer sponsoring the plan during or after the year you reach age 55.
4. IRAs are protected under federal bankruptcy law; state law creditor protection of IRAs varies. Consult your legal adviser for more detailed information

 

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