Spring has officially sprung. Now's the time to shed your winter coat, tidy up the boxes in the attic and sweep away all that dust in the garage. While you're in cleaning mode, it's a good idea to get your finances in order as well. One natural place to start is with your 401(k) plan, or perhaps, plans. If you have old 401(k)s from previous employers, it's important to know what your options are for dealing with those accounts.
Generally speaking, there are four choices when it comes to handling your 401(k) when you leave a job. It's important to think through these options and make the decision that's right for you. Here's what to consider:
Leave it, but don't "set it and forget it." Your first option is to keep the funds in your old plan, assuming your former employer allows it. While your 401(k) may continue to perform in line with the market, you will no longer be able to contribute to it since you're no longer working at your previous company. If you choose this option, you should check your investment allocations to ensure they reflect your current preferences and then continue to adjust these over time. Fees are another thing to keep in mind. Some previous employers may charge you extra administration fees, which could eat into your overall return, as could excessive investment management fees.
Roll it over. A second option is to roll over your old 401(k) into an individual retirement account (IRA). This will allow you to keep retirement assets invested in a tax deferred account. An IRA may also offer greater investment flexibility including mutual funds, ETFs, stocks, and bonds, as opposed to a 401(k) that is typically limited to a smaller core lineup of investment choices selected by an employer. In addition, an IRA often provides greater flexibility when people are ready to start receiving retirement income. According to the Employee Benefits Research Institute (EBRI),* 38 percent of workers have elected to roll over their old 401(k) into an IRA, so it's a common choice. However, if you move your 401(k) to an IRA, be sure to research any fees you may incur for opening and maintaining your account.
Transfer it to your new employer's plan. Your third option is to roll your old 401(k) over to your current plan. If you're considering this route, I'd recommend consulting with your new human resources department to confirm that rollovers are permitted. A quarter of workers in that same EBRI study have rolled over their old 401(k) assets into their current workplace plan, and these folks will enjoy advantages such as deferring taxes and avoiding potential penalties. Utilizing your current 401(k) rather than an IRA may also provide you with greater access to lower-priced investments that may be more readily available to investors in larger workplace plans than to individuals.
Take the cash. A final option is to take a cash distribution. However, I don't recommend this choice, as you'll need to pay income taxes on the distribution, and you'll likely have to pay a 10 percent tax penalty as well, if you are under age 59-1/2. This tactic also takes the money you have already allocated toward retirement and, if you're not diligent, potentially redirects it to other expenses entirely. Remember, planning for your retirement should be a priority at any age, so avoid any action that could derail your savings efforts for years to come.
Ask for help. Before you decide which option is best for your old 401(k), be sure to consider factors such as fees, available investment options, distribution options, legal and creditor protections, loan provisions, tax treatment, and other concerns specific to your individual circumstances. Some plans offer the option to speak to a professional who can help you make the best decision for your financial situation. A recent survey** found that 73 percent of respondents say they would be very or extremely confident in their ability to make the right 401(k) investment decisions with the help of a financial professional, versus only 44 percent who would feel that same level of confidence on their own. If professional advice is available to you, it's certainly worth checking out.
Again, now is the perfect time to track down your old 401(k) accounts and get your financial house in order. Seek out guidance, pick the option that works best for you and continue saving in your 401(k) as you work toward your retirement goals.
*EBRI 2016 Retirement Confidence Survey.
**2015 401(k) Participant Survey conducted by Koski Research for Schwab Retirement Plan Services, Inc. Koski Research is not affiliated with Schwab Retirement Plan Services, Inc.
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