Have you recently changed jobs and wondered what to do with the money in your 401(k) at your previous employer? You are not alone. It’s important that you know your options and consider the important factors in making the decision.
Options for your 401(k) money
When you leave your job and change employers, you have four options for your 401(k) money at your old employer:
- Leave money in the current plan (assuming the plan does not have minimum balance requirements)
- Roll money to the new employer plan (if the new plan allows)
- Roll money over to an IRA
- Cash out
Leave money in current plan
If you have more than the minimum amount in your 401(k) (usually more than $5,000), you can often keep your money in your previous employer’s 401(k). You will no longer be able to contribute to the fund and you will lose some of the benefits (such as the ability to take a loan), but you will still be able to access your account, make investment changes among the various funds that are offered, and get monthly statements. Some 401(k) plans also provide assistance to you to help you manage the account.
Each 401(k) plan has a document called a Summary Plan Description (SPD). The SPD will describe what investment funds are included and what the expense ratios are for those funds. 401(k) plans also offer a fee disclosure document, which explains the costs of the plan to participants.
Leaving your money in a 401(k) offers two additional benefits:
- Federal law protects money in 401(k) accounts from most lawsuits. If lawsuits, judgments, or collections are a concern, you may or may not be protected if you roll your money to an IRA. (IRAs are protected by state law, so you need to know what is protected in your State.)
- You may be able to withdraw money from your 401(k) at age 55 without a penalty, if you and your plan meet specific requirements. In an IRA, if you withdraw money from your account before age 59½ you may pay a 10% penalty. If you are in the age window of 55 to 59½ and you need to start taking withdrawals, you may be better off keeping your money in a 401(k).
Roll money to new employer plan
Many 401(k) plans allow participants to move their money from a previous employer’s plan into the new 401(k). This might be a good option if your new employer plan has better investment options or lower fees and expenses. You will need to perform due diligence on the new plan to ensure you’re aware of the pro’s and con’s.
Roll money over to an IRA
Rolling your money to an IRA may provide greater investment options and potentially lower fees and expenses. The typical 401(k) plan will have 15 to 25 investment funds from which to choose. Moving your money to a brokerage IRA account may give you access to the whole universe of investment funds, ETFs, individual stocks and bonds, and alternative investments. If you work with a financial advisor, you could also benefit from professional money management.
You have the option to cash out your 401(k) by taking a lump sum distribution. You must pay income taxes on the entire distribution in the year you receive the distribution. In addition, you may pay a 10% penalty for an early distribution depending on your age. Except in exceptional circumstances, such as an unexpected need to cover medical expenses or other hardship need, this option is rarely beneficial to you. Your best bet is to keep your money in either the 401(k) or an IRA to continue growing your retirement savings.
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.