James just landed the opportunity of a lifetime. After spending years climbing the ladder and working his way to the top, he’s finally been offered his dream job. It’s an amazing position, and everything he could want in a company. He’s looking forward to putting in his two weeks’ notice and wrapping up his projects at his current job. But that’s not all he has to think about…
When leaving a job, for whatever reason, there’s a million questions to consider. If you already have a new job opportunity, the question of income is answered – which is great! But what about your other assets? Have you thought about what you’re going to do with your old 401k?
You have a few options when it comes to your 401k. You could cash out, leave it with your former employer, transfer your assets to your new employer’s 401k, or roll it over to an IRA. So, what should you do?
In order to make the best choice, you need to have all of the information. An informed decision is typically the best decision.
So where should you start when making this decision?
Start out by gathering information. Call the plan to find out what types of fees you’re paying. A common misconception about 401ks is that you don’t pay fees on them. Spoiler alert: that’s not even close to true. For example, did you know that your plan subtracts fees for managing the plan? There can also be administrative fees subtracted too.
Compare those fees with your financial advisor. You should also take a look at dividend rates and compare those to your current 401k holdings. Take note of how much money you currently have in your account and what you are currently invested in within your 401k.
Once you have a better idea of what your current 401k situation looks like, it’s time to make a choice about what you plan to do with it. Let’s look at the options again.
1. Cash Out
I know, it’s tempting. A (presumably) big pile of money is just sitting there, and there’s so many things you could do with it.
Cashing out doesn’t mean you get all of the money that was in your 401k. There are taxes and penalties to consider. And worst of all, you’re not giving yourself the opportunity to earn more money.
To avoid these penalties and taxes, I urge you to avoid this option if having these funds in your bank isn’t absolutely necessary.
2. Leave It
If your 401k meets your old company’s minimum requirement, you do have the option to leave it with your former employer. But, leaving it comes with its own set of risks. In most cases, leaving your 401k with your former employer means you will no longer be able to contribute to it. You also run the risk of becoming disconnected from activity and unable to keep up with how your money is being invested. And don’t forget leaving your 401k still means you could be paying those management and administrative fees we talked about earlier.
3. Roll It Over To Your New Employer’s 401k
Your third option is to roll over your 401k money into your new employer’s 401k plan. One major benefit to this option is the new plan might have access to loans, which are not available with an IRA. Also, in general, assets held in a 401k are protected from creditors under federal law.
Just remember, 401ks can have higher fees and a narrow list of investment options for you to choose from. Make sure you call your new employer’s plan and confirm the fees you’ll be paying!
4. Roll It Over To An IRA
Your final option is to roll over your 401k money into an IRA. One major benefit to this option is the increased investment choices. Typically 401ks have only a few options, but with IRAs, depending on the custodian, you have access to all mutual funds, ETFs and securities that are publicly available giving you an increased ability to expand and grow your retirement portfolio. Plus, an IRA offers plenty of flexibility which can come in handy with changing wants and needs.
Rolling over to an IRA is the best way to gain flexibility over what your retirement funds are invested in.
Setting up an IRA can be intimidating for some if they’re new to investing, but that is what financial advisors and retirement planners are for. Working with a financial advisor will help you to stay focused on your retirement goals. Your financial advisor will help you maintain your IRA through regular communication and performance reviews to track and make necessary adjustments to ensure you’re meeting your retirement goals.
Is your money in motion? If you’ve recently switched jobs and are considering what to do with your ex-employer’s 401k, let’s meet! As a CRPC® designee, I specialize in helping people plan for retirement. Let me help you prepare for the future you want.