Do You Have an Old 401(K)?
When you leave your current employer, you may not be exactly sure what to do with the money in your former employer’s 401(K) plan. I have listed available options and detailed the factors to consider to help you make an informed decision.
The Options Available to You
- Keep the money in your old employer’s plan (if allowed)
- Rollover your assets into an Individual Retirement Account (“IRA”)
- Rollover your assets to another employer-sponsored plan (if applicable)
- Take a distribution in cash from the plan
Each of these options has advantages and disadvantages and should be considered carefully. This includes any applicable fees you will pay and all the features each option could provide you. Deciding to roll over plan assets to an IRA should reflect consideration of various factors, the importance of which will depend on your individual needs and circumstances. The following are general factors that you should consider when making your choice.
Factors to consider for keeping your money with your former employer’s 401(k) plan:
Tax Deferral
- Your money will continue to have tax-deferred status within the plan.
Additional Withdrawal Allowances
- There is no federal tax penalty for withdrawals if you are age 59 1⁄2 or separated from employment during or after the year you reach age 55.
Low-Cost Investment Options
- You have access to low-cost mutual funds or other investment options not available in an IRA, such as company stock, fixed annuity contracts, or stable value options. Also, you would not need to change your current investment strategy in the plan.
Protection from Creditors
- Assets in a retirement savings plan such as a 401(K) or 403(B) are generally protected from creditors and legal judgments, while assets in IRAs receive more limited protections from creditors.
Deferral of Required Minimum Distributions (RMD’s)
- Your employer-sponsored retirement plan may offer this feature if you are currently working for the sponsoring employer, over age 72, and do not have a 5% or more ownership in the employer.
Possible availability of Company Stock as an Investment Option
- If you hold company stock in your employer-sponsored plan, you should consider the tax impact of net unrealized appreciation.
Outstanding Loan Balances
- If you leave your employer, you may be able to continue repaying any outstanding loan.
- Alternatively, you may be required to repay the loan in full or have it become taxable. (Consult with the Plan’s Administrator to determine the consequences of any outstanding plan loan.)
Possible Plan Limitations
- Accounts of inactive or retired participants may have limitations, such as restrictions on plan loans, you may no longer be able to contribute to the plan, or your old employer could change plans or plan provisions in the future.
Factors to Consider if you Roll Over Assets Into an IRA from a 401(K):
Tax Deferral
- Your money will maintain its tax-deferred status. No taxes or penalties are applicable for direct rollovers.
More Investment Options
- IRAs generally allow for a broader range of investment options, which may include mutual funds, exchange-traded funds, stocks, and bonds.
Consolidation of Retirement Accounts
- Combining all retirement plan accounts into a single IRA may make it easier to track your assets.
- It also may make it easier to manage required minimum distributions required under federal tax laws.
Inability to Take Loans
- You will not have the ability to take penalty-free withdrawals as a plan loan.
Limited Access to Monies Prior to age 59 1⁄2
- Your access to IRA assets prior to age 59 1⁄2 will be limited to certain specific circumstances, such as first-time homebuyers and higher education expenses.
Potential Conflicts of Interest
- Your financial professional may have a financial incentive to recommend an IRA rollover because of the compensation that he/she may receive when you transfer funds from an employer-sponsored retirement plan.
- This potential conflict also pertains to situations where you are a participant in a plan and your financial professional is a fiduciary to the same plan.
Loss of Plan Options
- You may lose certain options offered by your former plan, which may include, but are not limited to, guaranteed interest rates, death benefits, and protection from creditors (under certain plan types).
Potential Charges for Rollovers
- There may be higher costs associated with a rollover and surrender charges could be imposed by the plan provider if the account included an annuity.
Additional Services
- IRAs generally offer access to more client-related services, including investment advice and management services.
Factors to Consider if you Roll Over Assets Into Your New Employer’s 401(K):
Tax Deferral/Additional Withdrawal Allowances/Low-Cost Investment Options/Protection from Creditors/RMD Deferrals
- If you move your assets into a new employer’s retirement plan, you may likely receive similar benefits such as these, as noted above.
Consolidation of Retirement Accounts
- It may be easier to track your assets and manage your retirement plan accounts with all your money in one place.
Plan Limitations on Accepting Rollover Assets
- Your new employer’s 401(K) plan may not accept rollovers and you must check beforehand.
Possible Limitations on Access to Funds Rolled into the Plan
- Check with the receiving 401(K) plan to confirm the plan does not impose any restrictions on your ability to access or withdraw funds rolled into the plan.
Factors to Consider if you Take a Cash Distribution:
Withdrawals May Be Subject to Withholding, Penalties, and Other Charges
- The withdrawal will be subject to mandatory tax withholding, as well as applicable tax penalties for early withdrawal (with limited exceptions) if you are under the age of 59 1⁄2.
- You may also be subject to surrender charges or penalties assessed under the terms of the applicable investment.
Additional Things to Consider:
Plan Costs
- Fees and expenses are factors that will affect your investment returns and your retirement income.
Types of Costs
- Both employer-sponsored plans and IRAs typically involve (1) investment-related expenses and (2) plan or account fees.
- Investment-related expenses may include sales loads, commissions, the expenses of any mutual funds in which assets are invested, and investment advisory fees.
- Plan fees typically include plan administrative fees (e.g., record-keeping, compliance, trustee fees) and fees for services such as access to a customer service representative.
- In some cases, employers pay for some or all of the plan’s administrative expenses.
- IRA account fees may include, for example, administrative, account set-up, and custodial fees.
- You should identify and understand all of the fees and expenses associated with your current retirement plan account, any new retirement plan into which you contemplate a rollover, and any potential IRA.
Documentation
- You should collect any and all documentation you have available in order to track what costs you currently pay.
- Documents such as your plan’s “Summary Plan Description” or “404(A)(5) Fee Participant Disclosure” will give you this information and can be requested from your Plan’s Administrator or human resources department.
The Comparison of Services and Investment Types
- The types of services and investments available to you in your current retirement plan and any recommended rollover may differ. Working with a financial professional could provide you with additional services such as customized investment strategies, cash flow analysis, financial planning, retirement planning, distribution planning, or other possible services that may not be available to you in your 401(K) plan.
- You may also have access to investment types such as individual bonds, common stock, mutual funds, exchange-traded funds, or alternative investments that are not offered in your 401(K).
Hopefully, this was helpful and you feel more informed about the things you can do with the money in your former employer’s 401(K) plan.
Feel free to email us at info@westernreservecm.com with any questions you have. If you would like to schedule time with us to discuss your specific situation click here.
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