Question: What should I do with my 401(k) account when I leave a job or when I am preparing to retire?
Answer: To give you a better understanding of your 401(k) options, I will review four strategies.
1. Do Nothing
You can simply leave your retirement account as it is. You need to be aware, however, that doing nothing may create problems for you later, such as simply neglecting the account without considering how you want it to serve you. Also, changes in the 401(k) may take place after you leave your job, causing confusion and uncertainty. Most often people do nothing because they are uncomfortable about managing their 401(k) or are even reluctant to ask for assistance.
2. Cashing Out
Cashing out is usually your worst option. This is because you will be required to pay taxes on the 401(k), or any other tax-deferred account, when you take cash distributions. In addition, if you have not reached certain eligibility requirements, you may also incur a penalty. Finally, you will lose any potential long-term, tax-deferred growth.
3. Rollover into a New 401(k)
When your new employer offers matching 401(k) contributions it is most likely easy to decide to participate. But should you rollover your old 401(k) into the new one?
The two main criteria to consider are the costs and the investment options:
A. Who pays for record keeping, consulting, and administration–the employer, the employee, or both?
B. Review the investment lineup and choices. Are you able to build a portfolio from these offerings that aligns with your goals?
Answering these questions will help guide you to a decision.
Also, if you do decide to rollover your old 401(k) into your new 401(k), you should always double-check how your moneys will be invested from day one. Will your rollover funds sit in cash or will they be invested in the options you selected?
4. Rollover into an Individual Retirement Account (IRA)
One benefit to this approach is that an IRA usually offers more investment options and fewer administrative costs than a 401(k). But know that the onus is on the individual to manage the IRA properly, so be sure to have someone double-check your rollover paperwork. The last thing you want to have happen when you visit your accountant at tax time is to realize that you have triggered a taxable event because of your carelessness.
We are happy to discuss which of these options would work best for you.