If you have changed jobs or are considering a job change, you will have to think about what to do with your 401k. There are basically three options: you could leave the money in your 401(k), cash the plan out, or roll it over to an IRA. Before you decide, it is important to consider the costs and benefits of each choice.
You could simply take your 401(k) money and spend it. This has a certain appeal in the short term, but it is not likely the best long-term choice. If you take the distribution and do not roll it into a new retirement account within 60 days, you will be taxed at the ordinary income tax rate on the entire value, minus any after tax or Roth 401(k) contributions you have made. Be aware that this could push you into a higher tax bracket and drastically cut into your savings. For example, if you are in a 25% federal tax bracket and 9% state bracket, you can easily lose 50% of your savings. Additionally, you may be subject to a 10% penalty on the distribution if you are under age 55.
It may be that you simply need the money now and do not have the option of keeping it in a retirement plan. In that case, it is possible to minimize the tax impact. If you have both taxable and nontaxable funds in your 401(k), you can roll over just the taxable portion and keep the nontaxable portion for you immediate use.
If you have less than $5000 vested in your 401(k), you have the option of leaving it in your employer's plan until you reach the plan's normal retirement age. If you choose to leave the money where it is, you will have to choose investments from the plan’s limited menu, usually consisting of mutual funds. Also, the annual compliance testing, administration, and tax return required for a traditional 401(k) can mean increased expenses for you.
Your best option may be to roll your existing 401(k) funds into IRA. An IRA offers more investment choices than a 401(k), and you can move money freely among any of the investments offered by the IRA trustee or custodian. This enables you to control your expenses by choosing low-cost funds and changing them when necessary. You also have the freedom to allocate money among different IRA custodians or trustees, allowing you freedom of choice in case you are dissatisfied with the customer service or return you see, as well as the potential for added diversification.
An IRA gives you increased flexibility in the timing and amount of your distributions. These are largely at your discretion. The exception is that at age 70 1/2, a traditional IRA requires that you begin taking minimum distributions. If your money is in a 401(k), your plan may more severely limit your distribution options.
Before making a decision about what to do with your 401(k), talk with one of our professional financial advisors. We will look at your individual financial picture and give you detailed advice about how to best structure your retirement savings to meet your personal goals. We are experts at 401(k) rollovers!
Material discussed herewith is meant for general illustration and/or informational purposes only, please note that individual situations can vary. Therefore, the information should be relied upon when coordinated with individual professional advice.