Author: Jaymon Meikle
You’ve finally done it. You quit your old job and accepted a new one that fits your dreams. You never thought you’d be leaving your old job, but the new opportunity was too good to pass up. Everything seems to be going your way and you’re enthusiastic about the years to come.
After you’ve moved your framed pictures and flower pot to your new office and found your shelf in the breakroom fridge, there’s one more persistent concern: What about my old 401(k)? What are my options?
That really depends on you – your life circumstances and your style as an investor. Today let’s look at the four basic options of what to do with an old 401(k).
Option 1: Leave it Where it Is
When you leave an employer, that doesn’t necessarily mean your 401(k) has to leave as well. Depending on your plan, you might be able to leave it where it is. 401(k) plans can be relatively inexpensive and leaving it there could be a valid option.
There are some plans that will want you to move your old 401(k) once you’ve ended your employment with the company. Your HR department (at the job you’re leaving) should know which plan you had.
Though leaving your 401(k) where it is can be a valid option, it does have some drawbacks. Depending on who sponsored your plan, it can be more difficult to make changes to the investment allocation and there is no way to add money to it. There is also no one to ask for help in deciding what investment option you should pick based on your risk tolerance and goals. 401(k) plan sponsors can provide you with information on the investments but cannot provide any type of advice on where to put your money.
Option 2: Roll it Over to Your New 401(k)
If your new employer has a 401(k) plan, you might be able to roll your old 401(k) into your new one. You will need to contact your new 401(k) sponsor to see if this is an option since not all plans will accept rollovers from an outside 401(k).
By rolling your money into your new 401(k), you can keep adding money to it through the contributions taken out of your paycheck and still utilize the low cost of investments.
Something to keep in mind with a 401(k) is that you are limited to the investment options offered by the plan. Each plan by law will offer a variety of diversified investment options, but if you don’t like the available options, you’ll be stuck picking the least objectionable one. Also, like Option 1, you won’t be able to get advice from the plan sponsor on how to invest your money with the options provided to you.
Option 3 – Cash it Out
If you listen closely you can hear the screams of horror from CPA’s and tax advisors that this option made the list, but it is technically an option!
A couple of things to know if you are considering cashing out. First, if you are under the age 59 ½, there will most likely be a 10 percent penalty on what leaves your old 401(k).
Second, all the tax-deductible contributions made, plus all the gains, are going to be taxable to you in the year you take the money out.
For the sake of easy math, let’s say you have $100,000 in your old 401(k) and assume that you are in the 24% marginal tax bracket and your state tax is 6%. If you were to cash in your 401(k) plan under age 59½, $10,000 (10 percent) just went to the IRS for an early withdrawal penalty. Then an additional $24,000 (24% tax bracket) went to the IRS for income taxes and $6,000 (6 percent state tax) went to the state for incomes taxes as well. So:
– $10,000 penalty (10%)
– $24,000 to IRS (24% tax bracket)
– $6,000 to the state (6% state tax)
$60,000 is left for you to use
This option can carry a heavy tax burden, but still could be a valid option depending on your situation.
Option 4: Roll or Transfer it to an IRA
Either by opening an IRA on your own or with an advisor, you can roll your old 401(k) into it. This will give you full control over your money and give you a much wider range of investment options. If you decide to work with an advisor, they can help you decide what investments are in your best interest.
By moving your money into an IRA, there is a decent possibility of higher fees and costs. Where ever you decide to open the IRA, or whichever advisor you decide to use, make sure to find out the costs you’ll incur.
Something to keep in mind if you decide to roll your money to an IRA is that you should try to have the check made out to the new IRA custodian’s name or have the money transferred directly to your IRA.
If you do a rollover of your old 401(k) and request that the check be made payable to you, you have 60 days to get the money into your new IRA or it is all taxable to you and your 401(k) sponsor is required by law to withhold 20 percent for taxes.
So, using the same example as before, if you had $100,000 in your 401(k) you would receive a check for $80,000. Now it is up to you to come up with an extra $20,000 to put into your new IRA along with the $80,000 check you received, or the $20,000 that the 401(k) sponsor withheld will be seen as an early withdrawal and will be subject to penalty and taxes. As far as the IRS sees things, $100,000 left the plan, it does not matter that you don’t have the money in pocket.
You can work with your old 401(k) sponsor and they’ll inform you on what you need to do to strategize for this situation.
The Big Question: Which of These Options is Best for Me?
And the answer is: it depends. What are your plans and goals? Are you 65 years old and needing the money for medical expenses or are you 30 years old and needing the money to buy a Tesla? Do you have a lot more wealth-building and investing years ahead of you, or are you right on the edge of retirement?
Your tax bracket – how close you are to the top or bottom – will make a big difference here. A little extra cash could cost you a lot of money in the end.
If you find yourself wondering what your options are with an old 401(k), or have any questions in regard to finances, come talk to us at Meikle Financial Group. We assist professionals and their families each day with these decisions, and we would love the opportunity to work with you as well. We’ll help you figure out how the 401(k) plays into your overall financial picture and what option is best for you based on your goals.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Advisor Networks LLC nor any of its representatives may give legal or tax advice.