For those who are unaware, InvestEd. is running a promotion during the months of October and November. For that reason, I wanted to highlight and go over the options that you have for your old 401(k) so you can make an informed decision to figure out what is most appropriate for your current situation. So, go find your old 401(k), pull out those old statements, dust off the binders or wherever you keep the information and let’s dive in together!
There are 4 options that you have with your old 401(k) plan, and they are:
1) Keep it where it’s at; you do not need to take any action and can leave it with the provider.
2) Full distribution; you can take all the money out, but taxes and penalties WILL apply.
3) Roll it over into your new/current 401(k)/employer sponsored plan.
4) Roll it over into an IRA (individual retirement arrangement).
1) No action/Leaving it at current provider
i. You don’t need to do anything, which is awesome.
ii. If you’re paying back a loan, you may be able to continue making payments on it.
iii. If you are over the age of 55 before you left, you can access penalty-free.
i. Administrative fees! These continue to be charged even if you are no longer working there.
ii. Limited investments. Based on the plan, you may have very limited investment options.
iii. Disorganization. The average person changes jobs 12 times during his or her career. That’s a lot to keep track of.
iv. Hard to access. If you do need the money may have limited options or expose yourself to taxes and penalties.
2) Full distribution
i. You can get your money and use it for whatever you may need it for at the time.
i. You’ll be taxed and penalized (20% minimum taxes withheld and 10% premature distribution penalty).
ii. You set yourself back years potentially for retirement.
3) Roll it over into your current/new 401(k) plan.
i. Consolidating and having everything in one place is definitely a plus
ii. You may be able to use the same fund you were using previously, and consistency is nice.
iii. You may be eligible for a loan, depending on the plan, which can be helpful in a bind.
i. Similar to leaving it in your old plan, you would have administrative fees, limited fund selection, and it’d be potentially hard to access if you do need the money.
4) Roll it over into an IRA
i. You control what investments it is in and it can be invested in anything actively traded in the markets.
ii. Accessibility. If you do need to take the money out, you can take out what you need, but penalties and taxes still apply.
iii. You’ll have the ability to work with an advisor. Most advisors cannot manage your 401(k) for you, but with an IRA, you open up that avenue.
i. If you are over age 55 and were still working at your company, rolling it over into an IRA would mean that you WOULD pay that 10% penalty before 59.5.
ii. If you are/were paying back a loan and able to continue making payments, this amount may come out of the rollover and you’d be liable for taxes and penalties.
These are your options when considering what to do with an old 401(k). If the option you should choose doesn’t seem clear yet, we recommend you schedule a one on one meeting with us to review your own personal situation. We can help out by reviewing your CURRENT and OLD 401(k)s. The meeting/consultation is free and we hope you take advantage of it. Feel free to comment/respond here or email me personally at firstname.lastname@example.org