It doesn’t matter if you’re still working, recently changed jobs, or approaching retirement; if you have an old 401(k), 403(b), or 457 plan that’s been sitting untouched after you left an employer, you need to ask some critical questions.
- Leave it where it is?
- Move it to your new employer?
- Roll it over into an IRA?
Notice that not one of the above options was to cash out of your plan. Using a job change as an opportunity to access 401(k) funds is generally not in your best interest, especially while you’re still working. If you’re under retirement age, you’ll owe the IRS a 10% penalty in addition to income taxes. Your employer will also be required to withhold 20% of your balance.
Sometimes, keeping it where it is may not be an option if your balance is less than $5,000. In fact, if you do nothing and your balance is less than $1,000, you’ll likely receive your distribution in the form of a check.
So, how do you decide if you should keep it where it is or move it out? Since employers design their plans to be “one size fits most” based on what the employer feels will benefit their employees as a whole, it will be up to you to re-evaluate your plan.
Ask yourself these 3 questions:
Are your old 401(k) investments aligned with your values? Changing jobs presents the opportunity to align your retirement assets with your values, especially when a self-directed brokerage option is not available. Investment flexibility and more choices are two of the biggest advantages of rolling over your plan to an IRA.
Are you sharing in the cost of administering your ex-employer’s plan? You may be sharing the financial burden of 401(k) recordkeeping, administration, revenue sharing and trustee costs with your previous employer. Rolling over assets to an IRA generally eliminates all these plan administration costs, making the cost/benefit of an IRA substantial.
Do you monitor your old 401(k) plan’s assets? It’s easy to say, “I’ll just leave it as is for now.” After all, it can be less stressful to stick with the status quo. But just like a hidden leak behind the wall of your home slowly causing water damage, your old 401(k) could be unknowingly causing financial harm and robbing you of future wealth. It’s up to you to keep track of your plan, making sure it’s aligned with your risk tolerance and goals. Old 401(k) plans started when you were in your 20s or 30s will most likely need to be rebalanced when you’re in your 50s or 60s.
There are other reasons you may want to consider rolling over an old 401(k). For example, the IRS provides several exceptions to the 10% penalty for distributions taken before age 59½, but only for IRAs. These exceptions include first-time home purchases, qualified higher education expenses, and living expenses on account of disability. Moreover, qualified charitable distributions cannot be made from an employer plan. Also, if flexibility with designating your beneficiaries is important to you, consider that most 401k plans will not accept customized beneficiary designations. In fact, all plans require that a married plan participant name their spouse as 100% primary beneficiary unless the spouse signs off to permit other beneficiaries.
Is leaving your old retirement plan where it is ever a good idea? It depends. If you’re considering converting retirement assets into a Roth IRA, then leaving an old plan where it is, may be the best option, at least temporarily. However, you should first consider your new job’s retirement plan (its investment options and costs). Better yet, remember to ask about a self-directed brokerage option. Keep in mind too that any retirement money you roll over into your new retirement plan, will be 100% yours. Also, if you’re retiring prior to age 59½, many employer plans allow you to start making distributions at age 55.
Need help navigating your old 401(k) or employer plan? Use this link to schedule a free consultation. If you’re already a client, log into the Azzad client portal and schedule an appointment with your advisor.