If you changed jobs or retired and left behind a 401(k) plan with your former employer, you may be wondering what to do with it. Fortunately, you have several options.
Before making your decision, you should consider features such as investment choices, fees & expenses, services offered, and potential tax consequences.
Here are four primary options:
ROLLOVER TO AN IRA
One of the most common and flexible choices is to rollover your old 401(k) into an Individual Retirement Account (IRA). IRAs come in various types, such as Traditional or Roth. This option provides several advantages:
- Investment choices: IRAs typically offer a more extensive range of investment options compared to employer-sponsored plans, giving you greater control over your investments.
- Consolidation: IRAs can accept rollovers from multiple employer retirement plans, allowing you to better manage your retirement savings.
- Manage alongside other accounts: If you have other investments, such as taxable accounts or 529 plans, you can potentially manage everything in one place.
- Tax-deferred growth potential: Just like in your previous employer plan, your investments can continue to grow without being taxed.
- No taxes or penalties: A direct rollover avoids taxes and penalties, preserving your retirement savings.
- Additional contributions: If eligible, you can make additional contributions to the account.
TRANSFER TO NEW EMPLOYER'S RETIREMENT PLAN
If you started a new job with an employer that offers a retirement plan, you may have the option to transfer your old plan directly into the new one. Some things to consider:
- Consolidation: Many employer-sponsored plans can accept transfers from other plans, allowing you to consolidate your retirement savings.
- Limited investment choices: You'll be restricted to the investment options offered by your employer's plan.
- Tax-deferred growth potential: Just like in your previous employer plan, your investments can continue to grow without being taxed.
- No taxes or penalties: A direct transfer avoids taxes and penalties, preserving your retirement savings.
- Additional contributions: You can make additional contributions to the plan.
LEAVE IT WHERE IT IS
Most employer-sponsored retirement plans allow you to leave your retirement savings in the plan after you terminate your employment. While this is a simple option because it requires no action, there are some factors to consider:
- Limited investment choices: You'll be restricted to the investment options offered by your previous employer's plan.
- No more contributions: You won't be able to contribute to this account if you're no longer employed with that company.
- Management challenges: Over time, you may accumulate multiple retirement accounts, making it harder to manage your overall retirement strategy.
- Tax-deferred growth potential: Your investments can continue to grow without being taxed.
CASH OUT (NOT RECOMMENDED)
You can choose to cash out your old 401(k), but this is generally discouraged unless you have a pressing financial need. Cashing out can have significant tax consequences and penalties. Here are some factors to consider:
- Access to funds: You can use your retirement money however you wish.
- Taxes: If in a Traditional account, you will owe taxes on the entire balance. If in a Roth account, it may be partially taxed depending on your age and how long the account has been opened.
- Early withdrawal penalty: If you're under 59½ years old, you'll also face a 10% early withdrawal penalty with limited exceptions.
In conclusion, the decision on what to do with your old 401(k) plan should be made carefully, considering your individual financial situation and retirement goals. We often recommend either rolling it into an IRA for more control and flexibility or transferring it to your new employer's plan if you're satisfied with their options. Leaving it with your former employer or cashing out are typically less favorable options and should be used sparingly.
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Before deciding whether to retain assets in a 401(k) or roll over to an IRA, an investor should consider various factors including, but not limited to, investment options, fees and expenses, services, withdrawal penalties, protection from creditors and legal judgments, required minimum distributions and possession of employer stock. Please view the Investor Alerts section of the FINRA website for additional information.