At some point or another, you may have wondered about what happens to your 401(k) when you leave your current job. When the time comes for you to either retire or start a new job, you will have to decide on what to do with your retirement plan.
You may have accumulated a sizable amount of money in this plan over the years. The 401(k) plan’s investments may be performing well overall.
But does this mean that you should just leave your money in your 401(k) plan with your old employer? What else can you do with it? Here we will examine the different alternatives that you can choose from when it comes to managing your retirement plan at an old employer.
401(k) Plan Alternatives
There are four basic options for your 401(k) money that you can choose from when you leave your job, which are:
- Leave your 401(k) plan with your older employer
- Roll your 401(k) over to an IRA
- Roll it over to your new employer plan (if new job)
- Cash it out
Leave Your 401(k) Plan with Your Employer
This is probably the easiest of the four choices. It requires no time or effort, and if your plan has grown substantially over the years, then you might just leave it be. Of course, there are pros and cons to this, which your financial professional can go over with you.
If you choose this route, it’s good to make sure that you are taking the right amount of risk in your plan. The investment allocations that you made 15 years ago may not be right for you at this point.
Talk with your plan sponsor to see whether you need to make any changes. It’s also prudent to get a rundown from your plan sponsor on the costs and fees that the plan is charging you.
Roll Your 401(k) Plan Over into an IRA
This is often the path that financial advisors will recommend that you take. Rolling your plan into an IRA gives you more control of your money. You also can have a far bigger range of financial options from which to choose.
If you would like certain investments but your previous employer didn’t offer those in their plan, then you can roll your plan into an IRA and invest in them with fewer limits. IRAs also usually charge fewer administrative fees than employer-sponsored retirement plans do.
Should this option appeal to you, you can ask your financial professional about ways to turn your IRA assets into retirement income streams. One big criticism of 401(k) plans by various retirement and financial experts is that it puts the burden of retirement income planning on people individually, who may not be familiar with the options at their disposal.
Your financial professional will have more latitude in terms of helping you by moving the money over to an IRA. That being said, every decision has pros and cons. Be sure to ask your financial professional about what those might be for you.
Roll Your 401(k) into Your New Employer’s Retirement Plan
If the investments in your new employer’s retirement plan look appealing, then rolling your old plan over into the new one may be a good idea. Just make sure that the new plan offers competitive choices and charges reasonable fees.
You should know that your new employer won’t make any matching contributions to any amount you roll into their plan. Another step is to find out your new plan sponsor’s policy on plan loans and in-service withdrawals. Should you roll your plan into your new employer’s plan and it doesn’t allow these, then you won’t have access to your money until you leave your new employer.
Cash Your Plan Out
The vast majority of financial advisors will strongly recommend that you not do this unless you absolutely must. Cashing out your plan will deprive you of years of future investment growth and income, and you may run out of money during retirement as a result.
You may also pay more in taxes than you would if you were to stretch out your withdrawals over a long period of time. For example, if you have half a million dollars in your plan and you decide to cash it out, you will land in the highest tax bracket for that year. And that is even if you are over age 59.5 and won’t have to pay an early withdrawal penalty.
In contrast, if you took out money over time – say at a 3% annual withdrawal rate – then your tax burden would be lesser per year and the tax hits spread out across that timespan.
If you have worked for several different employers, you can simplify matters by moving all your leftover plans into a single IRA. You can also make annual contributions into your IRA each year on top of your employer-sponsored retirement plan contributions.
However, you may not be able to deduct all your IRA contributions if you are now participating in your new employer’s plan. There is an income phase-out schedule that applies to IRA contributions if your adjusted gross income exceeds a certain amount.
An annuity may be a good idea if you are looking to generate guaranteed income with your money. Annuities can provide a stream of income that will last for as long as you live, even if you exhaust all the money in the contract. You can stretch your retirement dollars further along in this way.
The Roth Factor
If you ever made any Roth contributions into your retirement plan, then moving your money into a Roth IRA may be a good idea. Of course, you will pay taxes on all the pre-tax contributions that you made into your plan, so you may want to spread your rollover out over enough years to keep you in your current tax bracket.
But moving all your retirement money into a Roth IRA will allow you to avoid having to make required minimum distributions later. You also won’t have to worry about your Roth IRA withdrawals affecting the question of taxes on your Social Security payouts.
The Net Unrealized Appreciation (NUA) Rule
If you have invested any portion of your 401(k) money into shares of your employer’s stock, then there is a special rule that applies when you go to sell those shares. You can spin those shares off and sell them in a single bloc and receive long-term capital gain treatment on the sale.
There are some specific rules and conditions that must be met in order to do this. You can ask your plan sponsor what you need to do to be eligible for this tax break.
There are several possible disadvantages to leaving your retirement plan with your former employer. For example, your plan custodian may no longer have your best interests in mind since you are no longer working there.
You may also start to forget to monitor your plan since you are no longer receiving regular communications from your former employer. Keep this in mind when you are considering different options of what to do with an old 401(k) plan.
The right choice for what to do with your retirement money will ultimately depend upon a number of factors. Those include your current risk tolerance, financial goals, timeline for investing, financial situation, and monetary needs.
Consult your financial advisor for more information on what you should do with your retirement plan after you part company with your employer. If you are looking for a financial professional, for convenience many independent financial professionals are available here at SafeMoney.com.
Get started by using our “Find a Financial Professional” section and connect with someone directly. You can request an initial appointment to discuss your situation and explore a potential working relationship. Should you need a personal referral, call us at 877.476.9723.