At Reed Financial Planning Services, we realize that everyone doesn't stay at the same job forever. During your adulthood, you many change your job once or twice or for some it may be many times. You may have contributed to your company's 401(k) and now that you've left that job for a new one, you have to decide what to do with that account. The article below explains your choices and we are happy to answer any questions you may have!
One of the common threads of a mobile workforce is that many individuals who leave their job are faced with a decision about what to do with their 401(k) account.1
Individuals have three basic choices with the 401(k) account they accrued at a previous employer.
Choice 1: Leave It with Your Previous Employer
You may choose to do nothing and leave your account in your previous employer’s 401(k) plan. However, if your account balance is below a certain amount, be aware that your ex-employer may elect to distribute the funds to you.
There may be reasons to keep your 401(k) with your previous employer —such as investments that are low cost or have limited availability outside of the plan. Other reasons are to maintain certain creditor protections that are unique to qualified retirement plans, or to retain the ability to borrow from it, if the plan allows for such loans to ex-employees.2
The primary downside is that individuals can become disconnected from the old account and pay less attention to the ongoing management of its investments.
Choice 2: Transfer to Your New Employer’s 401(k) Plan
Provided your current employer’s 401(k) accepts the transfer of assets from a pre-existing 401(k), you may want to consider moving these assets to your new plan.
The primary benefits of transferring are the convenience of consolidating your assets, retaining their strong creditor protections, and keeping them accessible via the plan’s loan feature.
If the new plan has a competitive investment menu, many individuals prefer to transfer their account and make a full break with their former employer.
Choice 3: Roll Over Assets to a Traditional Individual Retirement Account (IRA)
The last choice is to roll the assets over into a new or an existing traditional IRA.³ It’s possible that a traditional IRA may provide some investment choices that may not exist in your new 401(k) plan.
The drawback to this approach may be less creditor protection and the loss of access to these funds via a 401(k) loan feature.
Remember, don’t feel rushed into making a decision. You have time to consider your choices and may want to seek professional guidance to answer any questions you may have.
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.
1. Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 72. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty.
2. A 401(k) loan not paid is deemed a distribution, subject to income taxes and a 10% tax penalty if the account owner is under 59½. If the account owner switches jobs or gets laid off, any outstanding 401(k) loan balance becomes due by the time the person files his or her federal tax return. Prior to the 2017 Tax Cuts and Jobs Act, employees typically had to repay loans within 60 days of departure or face potential tax consequences.
3. Under the SECURE Act, in most circumstances, once you reach age 72, you must begin taking required minimum distributions from a Traditional Individual Retirement Account (IRA). Withdrawals from Traditional IRAs are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty. You may continue to contribute to a Traditional IRA past age 70½ under the SECURE Act as long as you meet the earned-income requirement.