Changing jobs is a time of transition with a lot to do. Getting up-to-speed at your new employer is important and a top priority. When leaving a company, it’s crucial not to forget about your old 401(k) account. What to do with this retirement money is a critical decision to make during this period of transition.
When leaving your employer you have several options regarding your 401(k) account balance.
Taking a distribution will generally result in the money being subject to taxes and potentially a 10% penalty for those who are under age 59 ½. Unless the money is needed immediately for some reason, we generally do not recommend this option.
Leaving the money in your old employer’s plan can be a good option in some cases. However, some plans treat former employees differently from active participants in terms of the investments available to them. They may even place their money in a separate account designated for former employees who have left their balances in the plan.
We generally advocate that clients who are leaving their job consider rolling their plan balance over to either an IRA or in some cases to their new employer’s plan if applicable.
To the extent possible, it makes sense for investors to have their investments in as few places and accounts as is feasible for their situation. For example, it's easy to forget about an old 401(k) account at a former employer, especially if the account balance is relatively small. All retirement savings are important and should be managed in line with your overall retirement planning and investment strategy.
Rolling your 401(k) account to an IRA at an outside custodian or to a plan at your new employer, if applicable, can help ensure that this money is properly managed and not forgotten. It's easier to focus on managing funds in a smaller number of locations than if the money is spread across a number of accounts held by various custodians.
Having investments spread around in a number of locations is also terribly inefficient and takes more work on your part in terms of reviewing your asset allocation and other aspects of your overall portfolio.
Rolling a 401(k) over to an IRA account at an outside custodian offers a number of advantages in terms of managing your portfolio. It is often the path we recommend to our clients who are leaving their job and moving on to another company, or into a self-employment situation.
First, the IRA will offer a much wider array of investment choices than leaving the money in an old employer’s 401(k) or rolling the money over to a new employer’s plan. This includes investments such as individual stocks, bonds, and ETFs plus a much broader array of mutual funds than what is typically available inside a 401(k) plan.
This wider range of investment choices allows us to integrate this additional retirement money into the overall investment strategy we employ for the client’s other assets directly under management by us. We always work with clients to integrate the choices within their employer’s 401(k) plan into their overall strategy. But having the money in an IRA allows us to utilize the same investment options we use elsewhere in the client’s portfolio.
The quality of the investment menus inside 401(k) plans varies widely. Some plans offer a solid array of investment options. Plans offered by larger employers may offer a better menu than plans from smaller employers. However, when our client’s money is rolled over to an IRA, we can often invest the money in lower-cost options than those that were available in their old 401(k).
IRAs can also offer a degree of planning flexibility that may not be available in a 401(k). If it makes sense to do so, money held in a traditional IRA account can be converted to a Roth IRA. Money that was held in a designated Roth account in an old 401(k) can be rolled over to a Roth IRA where it will not be subject to required minimum distributions when you reach that age.
In some cases, we find that it makes sense for a client to roll their 401(k) balance over to a new employer’s 401(k). The key factor is the quality of the investments offered in their new employer’s plan. If this is the case, then merging their old 401(k) account into this new plan can enable you to manage a large portion of your retirement in a consolidated fashion that is in line with your overall strategy.
For those who are working at age 73 and beyond, money held in their employer’s 401(k) is exempt from required minimum distributions as long as they are not a 5% or greater owner of the company and if their company makes this election as part of the plan documents.
Additionally, 401(k) plans offer higher levels of creditor protection than IRAs, which can be a factor for some investors.
When leaving an employer, your choices regarding your 401(k) are important. This retirement money needs to be managed in a fashion that is consistent with your overall investment strategy to help ensure that it keeps working to fund your retirement goals. Generally rolling this money to an IRA, or in some cases to a new employer’s 401(k), will be the best course of action.
Please give us a call to discuss your 401(k), IRA, or any other financial issues. We are here to help.
Bill Canty, CFP®, CPA
Ed Canty, CFP®, Investment Advisor
Joe Canty, Investment Advisor
Maureen Walsh, EA, Tax Advisor
Tina Alteri, CPA, Tax Advisor