I’ve changed jobs, what should I do with my old 401(k) plan?
To rollover, or not to rollover? This is a question that is asked by millions of Americans on an annual basis, but why? It’s because there is no single right answer. Deciding to rollover an old employer retirement account (401(k), 403(b), SIMPLE, SEP etc.) should be based on the circumstances of your own individual financial situation and retirement plan.
Eligibility
The first piece of information that needs to be considered when discussing a rollover is if you’re eligible. In 2020 millions of Americans either lost their jobs, changed jobs, or were brought back on after being furloughed. If you have officially separated from your employer, whether it was your decision or not, you now have the option to rollover your employer retirement account regardless of your age. If still employed and older than 59 ½, you may be able to rollover your employer account with an in-service distribution to get your portfolio prepared for retirement.
What are my options?
Generally, when you leave an employer you will have four options:
- Leave the money invested in your former employer’s plan (if permitted)
- Roll the assets over to a new employer’s 401(k) (if one exists and rollovers are permitted)
- Roll the assets into an Individual Retirement Account (IRA)
- Cash out your 401(k)
Stay with the old plan – yay or nay?
In certain instances, it may be best for you to leave your money in your former employer’s 401(k), if permitted by the plan. Depending on the plan structure there may be certain winning investment options that are available to you which aren’t accessible in a new 401(k) plan or IRA. If you are now self-employed or move on to a new employer which doesn’t have a retirement plan available, it may also make sense for you to leave your old 401(k) alone. If you don’t have a place to roll the assets into then don’t feel rushed and make the mistake of cashing out the account. Lastly, your old 401(k) plan may permit loans to be taken out. This is something which isn’t allowed with Traditional IRAs. Thus, if you expect you may need some short-term money soon, then 401(k) loan options should be considered. Although we generally don’t recommend this method of financing, a 401(k) loan could serve as a valuable resource to you.
Rollover the assets to a new employer’s 401(k)
This could be the right choice for many based on much of the same reasoning for keeping your old 401(k). The new employer’s 401(k) could have certain low-cost investment options that you can’t find elsewhere. The new plan may have loan provisions available. Additionally, this simply could afford you the convenience of consolidating your investments and having fewer accounts to track and manage.
Rollover the assets into an IRA
One of the most important reasons for making this decision is the ability to gain more control over your investment options and the fees associated with those investments. Almost all 401(k) plans will have a set investment line-up to choose from.
If you don’t like the investment options or the fee structure, then you are going to want to look to move that money elsewhere. Individual Retirement Accounts (IRAs) would be the place to look because they allow you to purchase virtually any type of asset (i.e. stocks, bonds, mutual funds, ETFs, CD, REIT, annuity, etc.). Within an IRA, you decide how you want your money allocated and can compare the fees/cost of those assets. Whether you choose to self-direct these investments or hire a financial advisor/money manager to do it for you, you’re in the driver’s seat to decide.
Take the money and run
In almost all scenarios cashing out your 401(k) before retirement is not recommended. This bridge should only be crossed in true emergencies. If you take a distribution prior to age 59 ½ then the IRS is going to impose a 10% tax penalty in addition to you owing normal income taxes on the money. This approach usually means that you’re paying higher taxes then you should and could put you behind on saving for your retirement.
The only constant in the rollover process is that you should consult with an advisor prior to executing any rollovers or distributions. These plan decisions can be extremely costly if not done correctly and in a timely manner. Additionally, they usually cannot be undone once executed.
Thus, if you find yourself in this situation and asking these questions, please reach out to us here at Old Port Advisors and we’ll gladly guide you through the retirement plan review and rollover process.