If you are getting ready to change jobs or may have already done so, there is something you should think about. That something is your old 401k plan and what to do with it. It doesn’t matter if you changed jobs ten years ago and never did anything with that old 401k or are changing jobs next week. When you leave a job and transition to another, you have four options that you may choose from. Weigh out the pros and cons of the methods below to conclude which may be the best for you.
- Take a cash distribution – This is probably not the best choice, as taking a lump-sum cash distribution may trigger an immediate 20% federal withholding tax. In addition, a 10% tax may apply if you are younger than age 59 ½.
- Leave the money in your previous employer’s plan – Your former employer must allow you to leave the money where it is as long as the balance exceeds $5,000. You will no longer be able to contribute to the account, but you will still decide how the existing assets are invested. Is this the right choice for you? Well, it is important to understand the fees and expenses associated with this plan and be happy with the investment options that are available to you.
- Roll over the money into new employer’s plan – Moving the money into a new plan is an easy, tax-free transfer. Combining your old plan with your new one will help simplify the process by keeping everything in one place. Once again, this option might be the answer if you understand the fees and expenses and like the array of investment options that might be available. Remember, one reason why you might not continue with your previous employer’s 401k plan or Roll Over the money to a new company is the lack of investment selection.
- Roll over the money into an IRA - This is the most highly recommended option. You would be able to avoid taxes plus have more flexibility and control. You can do this on your own or with the help of a Financial Advisor. One drawback of this option is you can not borrow money from an IRA. Most 401k Plans contain a loan provision, so if you think you might need money from your 401k Plan before age 59 ½ you need to take that into consideration. In addition, 401k plans have greater liability protection, compared to IRA’s.
If you are changing jobs now or in the past there are many options to choose from when it comes to your 401k. There is no right or wrong answer. But some options can cost you money during your working years. This cost can come in higher than normal fees and expenses or poor investment performance. It is important to explore your options and ultimately decide which best fits your needs. I advise you speak to your tax advisor, or a Financial Advisor, so the pro and cons of each option can be fully understood.
As a Registered Financial Consultant (RFC) I would welcome the opportunity to discuss your options with you and provide you a detailed analyze of your options at no cost or obligation. Please feel free to contact me at (973) 533-1919 to learn more.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.