What Should You Do With that Old 401(k)?

Did you recently change jobs? If so, you’re not alone. The days of working for one company for your entire career are long gone. According to a 2014 Department of Labor study, the median tenure for American men at their current job is 4.7 years. For women, it’s 4.5 years.¹ That means around half of all workers have only spent around four to five years with their current company. Changing jobs regularly seems to be the new normal.

When you changed jobs, you may have left something behind at your former employer. No, not your favorite coffee mug. It’s your 401(k). Often, when workers change jobs, they have so much on their plate they forget about their vested retirement account balance.

If your vested balance is still in your former employer’s plan, you may want to take action and do something with it. If you don’t, you may find it difficult to manage the old balance. You could also forget it’s there, or if something happens to you, your loved ones may not know the account even exists.

Fortunately, you have options available. Below are common strategies for managing a 401(k) balance left at an old employer. Choose the option that best fits your unique retirement income goals and needs.

Cash it out.

You can always cash in your 401(k) plan and get a check for the balance made payable to you. If you need cash, this may be a tempting option. However, there are a few reasons why you may not want to go this route.

First, you’ll have to pay taxes on the distribution. Your plan administrator will likely withhold up to 20 percent of the distribution to cover income taxes. Also, if you’re under age 59½, you may have to pay a 10-percent penalty. Add the taxes and penalty together and that’s possibly 30 percent of the distribution you will not receive.

Finally, the whole point of contributing to the 401(k) was to save for retirement income in a tax-advantaged manner. By cashing out your plan, you may be eliminating much of your savings and setting yourself back in your effort to reach your retirement income goals.

Roll it over to your current plan.

You also may be able to roll your old plan over into your 401(k) plan at your new employer. This is usually a fairly simple process that can be initiated with paperwork from your new plan administrator.

The benefit of rolling your old 401(k) balance into your new plan is the convenience of having all of your 401(k) funds in one account. You can quickly make investment changes or perform any other kind of management. Also, if you pass away, your beneficiaries only need to fill out forms for one account.

Additionally, you won’t face any penalties or taxes for this kind of transaction. Since the funds go straight from one plan to another one, the money never touches your hands. Even if you’re under 59½, you can complete this rollover without fear of penalty.

Roll it into an IRA.

A third option is to roll your old plan into a traditional IRA. Like a rollover into your new 401(k), this process doesn’t trigger any taxes or penalties. Rather, the funds transfer directly from your old 401(k) administrator to your IRA custodian, thus avoiding the risks that come with cashing out your plan.

An IRA may offer more investment options than an employer 401(k) plan. That could help you find the right allocation for you goals and your risk tolerance. Also, if you’re working with a financial professional, they may be able to manage the IRA as part of your overall retirement income strategy.

Not sure what to do with your old 401(k)?  We’re happy to discuss your goals and needs with you and help you find the best strategy for your situation.

¹ http://www.bls.gov/news.release/tenure.nr0.htm

This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice.

 15627 – 2016/4/29