What to do with your 401(k) plan balance when changing employers
Generally, you have four choices:
1. Leave the balance where it is
2. Roll the money into your new employer 401(k)
3. Roll the money into an IRA
4. Cash out the balance
Option 1: Keep your money in your former company 401(k) plan
Investment fees may be lower when offered through retirement plans as compared to individual retail accounts
Fee disclosures must be provided to help individuals compare costs among plan investment options & to alert individuals to fees charged to their account
Some administrative costs may be paid by the employer
Employer is responsible for administering the plan in compliance with various laws & regulations
Plan may offer services such as access to investment advice, education, call center support
Plan assets are not subject to creditor claims
The menu of investments is determined by the plan fiduciary & may be narrower than in an IRA
Employer has the option to charge former employees’ accounts for certain administrative fees that are not being assessed against current employees
Option 2: Roll the money into your new employer 401(k) plan
This can be an appropriate option if your new employer offers a plan and you do not want to hire professional help. Most plans offer some on-boarding assistance for new hires. Consider the expenses of the new plan, the investment lineup and fees associated with the investment choices. If you are having difficulty identifying what the fees are in the new employer plan, email me.
Ability to consolidate assets to simplify investment decisions & overall management of retirement savings
Need to compare investment options, plan features, & services in new employer’s plan versus previous employer’s plan
Option 3: Roll the money into an IRA (Individual Retirement Account)
This can be a appropriate option if your account has grown to a sizable amount. “Sizable” varies from one person to the next, but I use 100k or more as a rule of thumb.
Working with a professional:
Not all financial advice is created equal. There can be a vast difference between one advisor and the next. The majority of my client’s value service. If you want the process to be efficient and expedited, working with an advisor could be the way to go. If you decide to use an investment advisor, you should consider these questions.
What is the objective of the professional?
Do they act in a fiduciary capacity in the oversight of your money? (Meaning, are they obligated to act in your best interest)
What services are they providing for the fee you are paying? (Planning or investments only)
How are they compensated?
How many accounts do they handle?
You should then ask yourself.
What am I seeking in an advisor?
How involved do I want my advisor to be?
Is the advisor locally based or will this be strictly a phone based relationship?
Is this someone I can trust?
Will I get the amount of service and attention I deserve?
If you would like to speak with me about your situation, schedule a consultation with me. There is no cost or obligation.
If you are comfortable moving the account and investing on your own, you can open a self-directed IRA and process a direct rollover. Self-directed accounts are usually less expensive; however, some people find this time consuming and would prefer to use an advisor. Be sure to compare expenses of your new employer plan and the self-directed accounts. If you are not comfortable handling the account on your own, you should consider hiring professional help. Investment expense is important, but so is the advice, the attention and service you receive.
Potential benefits of rolling to an IRA:
May have access to a broader range of investments than in an employer plan
IRA owner can change investments at any time (subject to IRA provider requirements)
IRA provider is required to provide a disclosure statement explaining the features of the IRA, serving a purpose similar to the Summary Plan Description provided for employer plans
IRA trustee or custodian handles contribution and distribution reporting & will assist with age 70½ RMD calculations
IRA owner may be able to make annual contributions to IRAs
Flexible conversion & re-characterization options enable IRA owner’s flexibility in deciding when to pay taxes on IRA assets
IRAs may offer more flexible beneficiary options (e.g., stretch IRAs) IRAs can be used to consolidate assets from multiple employer plans
IRA owner is generally responsible for selecting & monitoring investments unless the IRA owner engages an advisor to provide discretionary investment services
Investment fees may be higher when offered through an IRA as compared to an employer-sponsored retirement plan
The expansive fee disclosures provided to employer plan participants are not typically provided for IRAs
IRA owner is responsible for administering the IRA, with support from the IRA trustee or custodian
Services may be limited when compared to an employer plan (e.g., education, investment advice, support
RMDs must begin at age 70½ (traditional IRA)
Employer stock rolled from an employer plan to an IRA will be taxed as ordinary income when distributed, whereas stock held in other types of accounts may qualify for capital gains treatment
Option 4: Cash out the retirement savings
This most likely will not be preferred as this would be a taxable event on all pre-tax amounts.
Access to a broad range of investments
Access to the assets at anytime
No age 70 ½ RMDs
Flexibility regarding distributions
Individual is responsible for the investments and analyzing tax implications
Taxation on all pre-tax amounts in the year of distribution
10% early distribution tax applies, if under 59 ½
Let me make it easy for you
I can assist in helping you decide which option might be best. I hold myself to a fiduciary standard and aim to act in your best interest. To learn more about my services please visit my web page www.newpointewealth.com or email me at Derek@newpointewealth.com to discuss your situation.
For more information, further detail on the topics discussed in this article, useful links, definitions and disclosures please refer to the attached LPL Financial IRA Rollover Guide.
Disclosure: Securities and advisory services offered through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor. Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 may result in a 10% IRS penalty tax in addition to current income tax. The term "stretch IRA" is a marketing term used to describe an IRA that is set up to extend the period of tax deferred earnings beyond the lifetime of the individual who created the account. The accounts are typically designed to last over multiple generations. Investing involves risk, including possible loss of principal.