If you are leaving your job and have a retirement plan, you have several options. You have the option to leave it alone, cash it out, roll it into an IRA or roll it into a retirement account with your new employer. What can you do with your old retirement plan 401k?
You have the option of four options, theoretically speaking.
Withdraw your funds
If you are under the age of 59 ½ and you withdraw the money, you’ll have to pay a tax penalty on it. Unless you meet some exceptions: medical expenses; your first, primary residence (upto 10,000); health insurance premiums while not employed; distributions from an inherited IRA; pay off an IRS Tax Levy; higher education expenses.
If you don’t meet any of those criteria and you’re under 59 ½, you’ll have to pay that penalty. It’s not worth it. UNLESS you’re using that money to pay off a credit card. Credit card interest rates can be as high as 10%. So if you’re saving yourself from paying a 27% interest rate, theoretically, you’re making a 17% return on your money (27–10=17). But this calculation doesn’t account for taxes so you might come out even, or behind.
It makes sense to explore other options 95% of all the time.
Keep it there
Some people will decide to leave their 401k with their former employer. While I believe a lot of it is due to laziness, it can also be a rational and good decision. The main factor is cost. What are the costs of the 401k plan? Typically, if it’s a large employer and/or a large plan with a lot of assets, the fees are going to be low.
This could be a reason to cancel the plan. There might be good investment options. The fees might be reasonable or average. If you are happy with the investment options, it may be worth staying.
It’s your turn!
Nine times out of ten, I’ll have people roll their old 401k into their new one. If they’re able to. Some employers don’t allow income transfers. It is much easier to manage everything when you have everything in one place.
The only time I don’t think it would be appropriate is if the new firm has high fees, but it’s also important to compare the new fees to the fees of the alternative. Another option is to roll it into an IRA at a different firm.
Transfer it to an IRA
This option is best for me as an independent financial advisor but it’s not always the best for my client. Take the standard fee for a financial planner (1.00%) and compare it with the standard expense for a 401k participant. Employers with more than 2,000 employees pay less than 1%, while employers with 50 employees or less pay 1.25%. Here’s some more info on that.
That might be the case if it’s a small plan. However, large plans can charge an all-in fee of about.5%.
The answer to many questions in finance is not always simple. It is important to evaluate and compare your options before making a decision. These are the things you need to think about: cost, investment options as well as ease of management and customer service. How does the cost of fees compare? What are the investment options available? Is everything accessible in one place, and can you make changes easily? Are you able to get in touch with someone for any problems/questions?
Similar reading:
7 Tips to Make the Most of Your 401k vs. Pension
Penalties and Withdrawal Taxes on 401k
Is your 401k Hurting you or Helping you?
How 401k Fees Impact Your Retirement
Disclaimer:
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Jacob Sensiba is my name and I’m a Financial Advisor. My areas of expertise include budgets and wealth management. Please feel free to contact me at: jacob@crgfinancialservices.com