You’ve got an old 401k or 403b, what now?

Brass tacks -

You've got 4 options:

1. Roll it over to an IRA
2. Stay in the old plan
3. Roll it over into the 401(k) plan with your new employer
4. Withdraw it as cash and pay penalties

Roll over to an IRA —

An individual retirement account (IRA) functions similarly to a 401k, but you have more autonomy over what your money is invested in, as well as where it is held.

• Pros
  • Choose from a wider range of investment options
  • Consolidates accounts and simplifies your financial recordkeeping
  • Keep the same tax benefits if you roll over to an IRA
  • Avoid any additional taxable penalties
• Cons
  • You must complete rollover paperwork and open an IRA if you don’t already have one
  • You are not able to borrow against the IRA account value

When rolling over your 401k to an IRA makes sense:

When your plan stops paying the costs to maintain the account, and they are more expensive than an IRA.

If you have a large balance and want more investment choices or you would like to invest in individual stocks or bonds.

When you would like to work with a financial professional and they have minimum asset under management requirements.

Stay in the old plan —

• Pros
  • Less work than moving it or rolling it over
  • May want to do this if you are 55 and anticipate needing the money later, but before age 59 ½
• Cons
  • Fees may increase
  • Can no longer contribute to the plan
  • “One more account” to manage- makes it more difficult to have the proper investment allocation when doing so over multiple accounts
  • Might lose access to benefits that your new plan offers like lower expenses, more services or better access to loans

When staying in your old 401k makes sense:

You do not yet have a new job (or you don’t yet qualify for the benefits) and your previous employer is covering the costs of the account maintenance. Or, you do not wish to move account due to paperwork needs.

Move to your new employer plan —

• Pros
  • If your new employer accepts rollovers, you can keep the tax benefits while consolidating your retirement plan money
  • It’s easier to keep up with than having multiple funds at multiple companies
• Cons
  • You are unable to take advantage of tax management strategies that happen when you leave a job

When rolling over your 401k to your new employer 401k plan makes sense:

Your new employer covers the costs associated with the investment management fee as well as administrative costs.

You may want to borrow against the value of the retirement plan and the new plan allows borrowing against the account value.

Cash out —

• Pros
  • Gives you cash in hand
• Cons
  • You will owe applicable taxes at your current income tax rate
  • If you’re not 59 ½ years old yet, you will owe an ADDITIONAL 10% early distribution tax
  • So, if you are in the 32% tax bracket because of that extra income, that can eat up as much as 42% of your retirement savings

When cashing out your old 401k makes sense:

As an advisor, I tend to recommend against this option where possible as you have a limit on how much you can contribute to a retirement account per year and will pay a penalty and income tax.

This option makes sense when you have a pressing need for cash now and you are not able to borrow against the 401k value.

Before you decide, be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. It may prudent to speak with a financial advisor to determine if there are strategies, like a Roth conversion or others that make sense based on your unique situation.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Charlotte Galamb and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.

Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment decision. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The forgoing is for informational purposes only and is not a recommendation.