Now that you’ve got a new job it’s time to look forward to new opportunities and leave behind old challenges, but don’t forget to pay attention to your existing 401(k). With all the time and hard work to earn it, it’s important to make sure your money is well invested and continues to grow.
Now let’s discuss the four main options for handling your existing 401(k) account:
1 - Keep it in your former employer’s plan
This is certainly the path of least resistance, but isn’t always optimal. Employer plans typically have access to lower cost investment options than you would on your own, though choices are often fairly limited. Additionally, you won’t be able to continue to contribute to that account, so you’ll want to open another 401(k) plan with your new employer -- meaning you’ll have to keep track of both accounts, statements, etc.
2 - Roll your money into your new employer’s plan
Some employer plans will accept rollovers from other retirement plans, if you’d like to combine your old and new accounts. Before doing so, make sure you understand the fees of your new account, and if there are suitable investment choices. Not all 401(k)s offer the same breadth of investment options, so you’ll want to ensure that you’re not losing out.
3 - Move your money to an individual retirement account (IRA)
You also have the option to move your 401(k) into an IRA or Roth IRA, which typically have much broader investment options. Since 401(k)s are subject to the rules and investments your employer selects, you’ll have more freedom by selecting your own IRA account. Additionally, if you have an investment advisor, you may be able to bypass the minimum initial investment amounts imposed by lower cost funds that you would face as an individual customer.
If you choose this option, be sure to set up a new IRA first, and then ask your former employer’s plan to transfer your money directly from the 401(k) into the new IRA account so you don’t experience any unnecessary tax issues.
4 - Cash out your old account
It’s worth noting that you absolutely have the right to cash out your old account. However - this option comes with big tax implications and should only be selected if you’re fully aware of the complications. Of course, this option does give you immediate access to funds, but it comes at a steep cost: cashing out before age 59 ½ incurs a 10% early withdrawal penalty in addition to income taxes owed. Not to mention, you’ll have taken a big chunk out of your retirement nest egg.
Making your decision
There’s no one-size-fits-all policy for what to do with your 401(k) funds when you leave your employer. Paceline can help you assess your options in more detail and choose the path that makes the most sense for you.
For a free, no-obligation consultation, or a Portfolio Second Opinion, please contact us.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.