You’re leaving your current job. Maybe you’ve retired, or you’ve taken a new job with another employer. Or maybe your current employer has laid you off.
One decision you’ll need to make is what to do with your employer-sponsored retirement account with your former employer (i.e. 401(k), 403(b), SEP IRA, profit sharing plan).
Let’s explore some of the options you have.
KEEP YOUR ACCOUNT
If your account balance is more than $5,000 you have the option to leave your account with the old plan.
Why would this make sense?
Your old plan might have excellent investment options, and/or low fees and expenses. Perhaps your new employer doesn’t offer a plan, or if they do, it’s not as attractive as the old one.
Note that if your account balance is less than $5,000, your former employer can require you to move it out of the plan. In that case, you have three options, which are described below.
If you’ve changed employers, and your new employer sponsors a retirement plan, check to see if the plan accepts rollovers. More that plans aren’t required to do so. If it does, and the investment options are adequate and the fees and expenses are reasonable, you may want to request a direct rollover. This involves the old plan’s administrator moving your account balance directly to the new plan.
ROLLOVER TO IRA
If you’ve retired, or if your new employer doesn’t sponsor a plan, the plan doesn’t accept rollovers, or the plan isn’t attractive, you can ask the old plan’s administrator to make a direct transfer to an Individual Retirement Account (or “IRA”) in your name. You can establish an IRA with virtually any financial institution – as well as with many insurance and mutual fund companies – and no taxes will be withheld on the transfer. The IRS provides a lot of information on the rules and regulations for rollovers, which you can read here.
Generally speaking, the worst possible decision you can make regarding an old retirement account is to have the plan’s administrator send you a check.
The reason this is such a poor choice is that your distribution will be subject to income tax – state, if applicable, and federal. In addition, if you’re under the age of 59 1/2, you may be subject to additional 10% early withdrawal penalty. So, once the taxes and potential penalty are paid, you could well be left with less than half your original account balance. There are a few exceptions to the penalty, which you can review here.
WHAT SHOULD YOU DO?
If it seems like the decision on what to do with your old 401(k) account isn’t clear, you’re not alone. The regulations can be complex, and they can change from time to time. That’s why we’re sharing a handy guide to understanding the options you have for your old traditional 401(k) account.
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