How to Handle Your 401(k) When You Leave a Job or Retire?
As advisors, we often get asked “what should I do with my 401(k)?” The reason for this question is because most individuals will experience some type of transition throughout their careers. Some individuals leave their current employer and join a new one. Others, unfortunately, may face the hardship of being let go. Others, after enjoying a rewarding career, just retire.
Regardless of the transition you face, you have four options for your 401(k):
- Keep it where it is in your existing plan.
- Roll it into the 401(k) at your new employer (if allowed).
- Roll it into an Individual Retirement Account (IRA).
- Cash it out, withdraw the funds.
Let’s explore each option and what implications they have on the choice.
Keep it Where it is
To start, keeping your 401(k) where it is is pretty self-explanatory. It is the most common choice according to a recent study conducted by the Vanguard Group. The study found that investors who separated from their employers in 2018 were more likely to keep their 401(k) where it is currently when compared to the other options. This is understandable since it requires almost no work or any decisions. Now, although this option was picked the most by individuals, it does not mean it is the right choice.
One major disadvantage of leaving your 401(k) at your previous employer is you tend to lose interest and focus on these funds. It is human nature not to be as attentive to the account. Your 401(k) becomes money in an account you rarely review. Unfortunately, this can have some adverse outcomes.
- Funds or investments in the account can change.
- Fees and expenses can increase.
- Rebalancing can be difficult and stops altogether.
- Your allocation becomes unbalanced which can increase risk and lead to losses.
Roll into New Employer Plan
Next, option 2 is common when your new employer allows you to move your old 401(k) assets into your new 401(k). However, it must be written in the new 401(k) plan that outside rollovers are allowed. If this is an option, then you must liquidate your old 401(k) and have the cash sent directly to the new plan. The major advantage of doing this is eliminating multiple 401(k) plans. By consolidating them into a single plan, management becomes easier. However, we believe it is necessary to understand the details of this move.
The challenge many individuals face is that 401(k)s are unique to each company. The investments at your old 401(k) plan will not be the same as your new employer. The new plan may have limited investment options or higher fees than your current plan. Other features, such as access to funds or loans may be more restrictive. Only when you fully understand both plans, should you consider this option.
IRA Rollover
Rolling over into an IRA is often selected when an individual wants to take control of their retirement assets. They do not like the option of leaving their funds at their old company and the new company 401(k) plan is a poor option. This is also the option most often selected by retirees. An IRA can often be a welcomed change for former 401(k) participants because of many additional benefits. They are listed below:
Investment Selection- Employer-sponsored 401(k) plans have a restricted investment selection in order to control costs. Usually 401(k) plans have a limited choice of mutual funds, ETFs and target-date funds. The selection often lacks diversification and many may be poor investments. On the other hand, an IRA gives you full access to the investment marketplace. With an IRA, you are in control. You have access to the best funds, and can establish an allocation to suit your goals. One investment most individuals did not have available in a 401(k), but now find exciting in an IRA, is the ability to purchase individual stocks.
Fees & Expenses- High expenses and fees can diminish investment gains, especially in retirement accounts held for decades. Therefore, many 401(k) plans now offer funds with low-cost institutional pricing. We understand low cost can be attractive. Again, in an IRA you control the investment selection. You will not have to settle for poor performance just because the funds in your 401(k) plan have low fees.
Access to Funds- Once an individual retires, a reoccurring stream of income is often desired or needed. This is not something 401(k) plans are set up to do. On the other hand, IRAs are ideal for providing continuous income and access to your money. Withdrawals are easy and often can be directly deposited into bank accounts.
Whether you roll your 401(k) into your new employer's plan or into an IRA, the IRS considers the transfer a non-taxable event. However, it must transfer directly from one qualified retirement account to another qualified retirement account. This is often referred to as a direct rollover. All other types of transfers will create a taxable event.
Cash Out
Finally, cashing out your 401(k) is when you request the plan administrator to send you the funds in your plan. It is important to understand the costs associated with taking your money out of a 401(k) plan. In addition to state and federal taxes, there is a 10% penalty if you are under 59 ½ years old. This option should be considered carefully due to the severe costs and reductions in payout.
If you are uncertain how to handle a previous 401(k) or need guidance with your current 401(k), please feel free to reach out to us for assistance.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this article will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Griffin Financial Advisors, LLC. The opinions expressed are those of Griffin Financial Advisors, LLC and are subject to change at any time due to the changes in market or economic conditions.
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