Article in Summary:
- You have many options with your 401k when your personal situation changes
- Your decision should only be made when you clarify what is most important to you
- See below for specific recommendations based on your personal situation
You made a great decision in participating in the 401K plan with your former employer. Now that you are retired, laid off, or you changed jobs, you need to determine where the best place for those funds is. Your choices are:
- Move them to your new employer’s 401K plan
- Move them to an Individual Retirement Account (IRA)
- Take the funds as a cash distribution
- Leave the funds in the present 401K
The cash distribution is not a good choice since it would trigger income taxes plus a 10% penalty. The real decision you need to make is whether to move it to a new 401K, to an IRA, or to leave the funds where they are now.
Your decision should only be made when you clarify what is most important to you, and then be aware of the details that relate to your situation. Below are items that can impact your decision. Please indicate which 3 of the following 8 factors are most important to you:
- Investment selection – Having a wide range of investment options from which to build an asset allocation can improve your rate of return.
- Low plan costs – Low fees can improve your returns (by as much as 28% over time).
- Professional investment advice – Receiving investment advice as opposed to only education can increase your returns.
- Professional portfolio management – Many investors don’t really know how to design a portfolio to maximize the return for the risk taken. Professional management can help design a portfolio that is right for you, reduce volatility and automatically rebalance over time.
- Converting your retirement plan to a Roth IRA – Roth distributions are tax-free as opposed to taxable, so that when withdrawn, no taxes will be due.
- Loans from your retirement plan – Borrowing from your 401K should be avoided if possible.
- Plan assets are protected from lawsuits it you get sued.
- Early distribution for ages 55 to 59 – This applies to those who retire before age 60. Few people can afford to do this.
If you checked items 1-5, an IRA may be the best choice for your old 401K funds. If you checked 6-8, moving the funds to your new employers’ 401K or leaving it where it is may be preferable depending on the fees and investment selection in the old vs. new 401K. If you have worked for two larger companies you can compare the two plans at www.Brightscope.com.
This Information will put you in a better position to make the best decision as to what to do with your old 401K funds.