By Matt Kory, Vice President, Retirement Programs
Changing careers is an emotional move – there’s excitement for the new opportunity, sadness about leaving your favorite coworkers behind, depression if you weren’t ready to leave, worry about how to financially bridge the unemployment gap and anticipation of the new career all at once.
Take a breath, you can take some time to understand your options. Remember to close that last chapter before you get too involved in your new one. Let’s go over the four things you can do with your old 401(k) to help you move on to your next great career adventure.
1. Roll It Into an IRA
One of the most common decisions is to roll your old 401(k) into an IRA account. This will allow you to maintain your tax-deferred status and continue to grow that nest egg for your retirement. If you’re not familiar with how to accomplish this consult a financial advisor. Preferably one who will help you evaluate your options and make sure you are making a decision that is right for you and your situation.
This could be your first opportunity to work with a financial advisor and learn about the financial planning process. Take advantage of this time with the financial advisor to make sure you’re on the right track. If you’re not, put a plan in place, get on the right track.
2. Leave It Where It Is
You may elect to do nothing and leave your assets in your old 401(k). Be sure you know the details on balance requirements before you do – the account balance may need to exceed a certain balance to be allowed to stay in the plan. Your plan documents will outline the specifics of this provision, so be sure to check the balance requirement and if there are any deadlines by which you need to move your assets out.
If your balance is below the minimum and you wait too long to do anything, your plan may send a check for the balance of your account to your last address of record. Be sure to review your plan documents when you leave your previous employer for balance requirements and timelines for rollovers. Your previous employer is required to give you 30 days’ notice before any liquidation occurs. If the career change means a change of address, this may mean notices may go un-notices so be proactive.
3. Cash It Out
Regardless of the balance of your old 401(k), you may elect to cash out and receive the balance in cash. There are a few very important tax implications to making this choice that may pertain to your situation, so consulting an experienced tax advisor is well worth your time.
These tax implications could include a 10% penalty on the balance if you’re under 59½ plus additional tax due at the end of the year because of your increase in income. It’s worth stating again, this decision is best made while consulting with an experienced tax advisor. Just because you can cash out when you leave employment doesn’t necessarily mean you should!
4. Roll It Over to Your New Plan
The final choice you could make, if your new employer’s plan allows, is to roll over your old 401(k) into your new plan. This will allow you to consolidate your employer benefit plan assets in one location. Depending on your stage in life and investment knowledge you may already see a potential drawback to this option – limited investment options in your new plan.
Talk to Your Financial Advisor
Ultimately, managing your 401(k) isn’t a decision that should be taken lightly. You should work with a financial advisor to ensure that you have a plan for your financial future. Your advisor can create a plan specific for you and set you on the right footing (or bring you back to the right path) for successful financial health.
Consider all available options, which include remaining with your current retirement plan, rolling over into a new employer’s plan or IRA, or cashing out the account value. When deciding between an employer-sponsored plan and IRA, there may be important differences to consider – such as range of investment options, fees and expenses, availability of services, and distribution rules (including differences in applicable taxes and penalties). Depending on your plan’s investment options, in some cases, the investment management fees associated with your plan’s investment options may be lower than similar investment options offered outside the plan.
