401k Plan Rollover Options
Long gone are the days where you get a job, work there until you retire and get a gold watch for your troubles. Americans will now have several jobs over the course of their working lives. The question is; What should you do with your 401k(s) from previous employers? There are four options; cash out the 401k, keep your plan with your previous employer, roll the 401k into you new employer’s 401k plan (if available), or roll the 401k into an IRA. Let’s take a deeper look at the pros and cons of each one.
Cash Out 401k Plan:
Once your employment terms, you do have the ability to withdraw the funds in your 401k plan. The benefit of cashing out your 401k plan is that you will have access to your cash.
If you do this, you will be subject to a 10% penalty (if you’re under age 59 ½) and if your 401k balance was invested on a pre-tax basis, then you will have to pay income taxes as well. Money that is invested in a 401k plan should be allocated towards retirement and is not the best use of short term cash.
Leave the 401k:
You can choose the easiest option which is do nothing. You can keep the 401k plan as is with your previous employer. You may have had a great 401k plan with low fees and a great selection of investments. 401k plans offer protection from creditors and offer the ability to take loans from your 401k balance.
As you move throughout your career, you may work at several places and accumulate a few different 401k plans. Collecting 401k plans is not ideals for a few reasons. First, you don’t have any control over the investment options in the plan and they can change at any time. Second, you cannot add any more money to the plan. Third, if you accumulate several plans, they can be hard to keep track of (even more so if the company is bought or goes out of business) and the funds will most likely have a significant amount of overlap.
Roll the 401k into the New Company’s 401k Plan:
Rolling the money into your new company’s 401k plan will help consolidate your 401k accounts. You’ll be able to take advantage of the 401k creditor protections as well as the loan features of the plan.
If you have a ROTH 401k, make sure that the new 401k plan has a ROTH 401k option. Before rolling any funds over, it would be a good idea to make sure you understand the fee structure and investment lineup of the new 401k plan.
Roll the 401k into an IRA:
Rolling the 401k into an IRA does have a couple of downsides. First, IRAs do not have creditor protection and you cannot take a loan from your IRA. The fees may be higher in an IRA depending on the investments that you choose. It would be a good idea to compare fees before rolling the money over.
On the plus side, IRAs offer more control and flexibility. You can choose between thousands of investment options whereas a 401k will typically have 30-40 investment funds to choose from. You can roll the money into alternative investments like an annuity. You would have the ability to convert a Traditional IRA into a ROTH IRA as well.
Overall, there are a few different options regarding what to do with your 401k plan. Each one has their strengths and weaknesses. You’ll have to decide what is right for you, but make sure you understand why you’re choosing one option over the other.