When you leave your job or retire, you have an opportunity to manage your funds that have been accumulating in an employer sponsored retirement plan such as a 401(k), 403(b) or government 457(b) plan. Depending on the situation, you generally have four options when you leave your employer.
- Transfer the assets to an IRA through a rollover
- Leave the assets in the former employer’s plan
- Transfer the assets to your new employer-sponsored plan
- Withdraw the money
Pros and Cons
There are pros and cons to each one of these options so it’s important to understand the benefits and potentially unintended consequences of each. Here is a summary of each, but reach out to a financial advisor who can discuss the details and apply them to your individual situation.
Transferring the assets to an IRA (individual retirement account) allows your money to continue to grow tax-deferred and gives you more control over investment options. You own the account directly and you won’t have to worry about making changes to the account if you change jobs again in the future. You can contribute more money to the IRA and if you change employers again, you can add those 401k funds to this same IRA. You avoid paying taxes on the rollover if you deposit the funds into the IRA within 60 days of receiving your 401k check.
If your former employer allows it, you may be able to leave the assets in that old plan. This may be the easiest option but is typically not the best option. You’ll no longer be able to contribute to the plan and you may be charged additional fees since you’re no longer an employee. Out of sight, out of mind can be an issue here. People are unlikely to adjust their investment strategies when they leave the 401k with a previous employer and even more worrisome is you may lose track of the money, especially if you change employers several times before retirement. There are no tax consequences to this option and the money continues to grow tax-deferred.
Transferring the assets to your new employer-sponsored plan is the third option. This option limits you to the investment options of your new employer but makes it easier to keep track of your account. The money will be subject to your new plan’s withdrawal rules, so you may not be able to withdraw it until you leave your new employer. The money will continue to grow tax deferred and there aren’t any tax consequences to this option.
Withdrawing the money is typically not recommended. You will pay tax on the total amount withdrawn plus a penalty if you are under 59 ½. You lose tax deferred growth on the money as well. There are limited situations where this makes sense, such as an emergency expense that you can’t handle with your savings account. Before you keep the check, talk to your financial advisor and CPA because this can have a negative impact on your taxes and your retirement plan.
If you need help deciding what to do with an old 40k plan, please reach out to us for a free consultation.
