What to do with Old Retirement Accounts?
Parker Gerard – Financial Advisor
“I’ve left my old company, what do I do now with my 401k?” Well, the answer really depends on your current situation, but there are several options that have now opened to you. Choosing which option is important, because there can be tax implications if done incorrectly or tax advantages if done properly. I’ve listed the most popular 401k distribution options below and the pros and cons of each decision.
Leave Account at Prior Employer
Most of the time, participants choose to leave assets at their prior company’s retirement plan. Around 25 million Americans left behind money in an employer sponsored retirement plan when separating from an old job, according to the Government Accountability Office which analyzed 10 years’ worth of data from 2004 to 2014. Keeping money in your prior company’s retirement plan can be a good idea if you are comfortable knowing that future contributions will no longer be accepted, and investment changes will be limited to the plan’s available fund lineup. If you don’t know what fees are being charged in the plan, I would recommend reaching out to the human resources department and requesting the 404(c) Participant Fee Disclosure notice. This will disclose the plan’s recordkeeping, advisory, and fund fees associated within the plan and can help with the decision-making process.
Rollover Funds to your New Employer’s Plan
Typically, we recommend rolling your prior retirement plan into your new employer’s retirement plan if one is offered. Think about it, we don’t just leave our dining room table, couch, and TV when we move into a new home, we take it with us. Consolidating retirement accounts makes portfolio allocation and any future changes easier to manage because everything is in one place.
Moving money out of your prior company’s plan can be a good idea especially if the account balance is less than $5,000. Most retirement plans feature a force-out option which allows the plan to rollover terminated plan participants with balances less than $5k into an Individual Retirement Plan (IRA), and if the account balance is less than $1,000 the plan can simply write a check distribution to the participant which will be deemed a taxable distribution.
Rollover Funds to an IRA
Another option would be to rollover the account into an IRA which feature the same tax treatment as retirement plans. Where this gets tricky is if Roth contributions were made in the prior retirement plan. If this is the case, then a Roth IRA will need to be opened in addition to a Traditional IRA to avoid intermingling of different money types. However, there are many benefits to rolling the account into an IRA. Most IRA’s offer greater investment options including individual stocks, bonds, and options. Ever wanted to buy shares of Amazon or Apple inside your retirement account? Well now you can with an IRA. In addition, as the name suggests, an IRA is an individual account titled in our name so the account will always stay with the us no matter how many job changes we have in the future. Americans are changing jobs more frequently than we ever have, so having one account to act as a ‘catch all’ for future retirement plan dollars can make a lot of sense especially if we anticipate changing jobs again in the future. This way we can have one account with one investment allocation dedicated to helping us reach our retirement goals.
The last distribution option is to simply “cash out” the account. This is an option that is almost never recommend because the distribution will be taxed at the participant’s normal income tax rate plus a 10% penalty will be paid if the participant is younger than 59 ½. It is important to remember that retirement accounts are long term investment strategies and we should avoid raiding our retirement plans early as these short-term decisions can hinder our ability to retire in the future.
It is always recommended to discuss your situation with a financial professional prior to making any changes. If any questions arise, please don’t hesitate to reach out to us at 407-951-8875 or by email at firstname.lastname@example.org.