As kids start going to back to school, I look back fondly on the Back to School shopping trips I had with my mom. In particular, I remember shopping for new shoes. I’d walk in wearing my completely comfortable, and well-worn sneakers. I’d spend a lot of time breaking those shoes in. In an effort to replace them with something just as comfortable, I’d have to try on multiple pairs of shoes and ultimately make a decision on a new pair. Do you remember asking the store clerk if you could put your old shoes in the box and wear your new shoes out of the store? I loved doing that. Once I left the store, I can’t say I ever recall taking my old pair out of the box. What happened to them? Did my mom give them away? Did she throw them out? I had moved on to the next pair and really couldn’t be bothered with the old.
Well…this might be acceptable when we get new shoes, but how many people leave their old 401(k) or 403(b) or similar employer plan behind as they move on to a new job and a new plan? Just because your next job is new and may be more exciting, don’t just leave your old money behind. If you don’t do something about it, no one else will either.
So, let’s review your options.
Leave it be
You can leave it. There are potential reasons for you to leave it. If the plan offers great investment options, that might be one reason. However, make sure you evaluate the expenses associated with leaving it there, because while some 401(k) fees may be lower, some may be higher. If you do leave it there, don’t forget to review it regularly and make sure the investment selections you made years ago are still appropriate for you today.
Roll it over
You have two options when rolling over your old plan.
First, you may be able to roll it into your new 401(k) plan. Check with your benefits department to see if it’s an option. Not all plans will accept rollovers. If you like what your new plan has to offer, this could be a feasible option.
Second, you can roll it over into an IRA. Many of our clients select this option because it provides a lot of flexibility. While 401(k)’s are limited in their investment options, investing in an IRA gives you an almost unlimited selection of investments to choose from. In addition, it can be a great place to consolidate all of your old 401(k) plans into one place making reporting, re-balancing, and investment allocation a lot easier.
An IRA may also provide more flexibility in naming beneficiaries than a 401(k), so if you are interested in more beneficiary payout options, this may be a good reason to consider rolling it over.
There are often reasons to keep your money in a 401(k), as well as reasons to roll it into an IRA. Please speak with a qualified financial professional, who can help you determine what is best for you.
Keep in mind, if you have a taken out a loan through your 401(k), you are typically required to repay it within 60 days of separation from your employer. As each plan is different, check with your plan administrator to find out more specifics. Any unpaid portion will be treated as a taxable distribution, including a 10% penalty if you are under age 59 ½.
Cash it in
While this really isn’t an option in my mind, it is allowed. I would not recommend cashing out a 401(k). By doing so, you lose any tax-deferred growth on your investments. Not to mention, you could be sacrificing your retirement nest egg by cashing out early. If you do cash it out, please be aware of the tax consequences. You will be taxed at your ordinary income tax rate for both federal and state on the entire amount you cash out. In addition, you will be required to pay a 10% penalty if you are under age 59 ½. So, in some cases, you can be losing almost 50% of your money just to have access to the cash…a very steep price to pay for a little liquidity. If you have cash flow problems, consider other options before taking cash out of your retirement plan. Be smart. Don’t make an impulsive decision that could adversely affect your retirement income in future years.
Of course 401(k) distribution rules can be complex. Before making any decisions, please consult with your financial advisor or tax advisor to make sure you understand the implications of your decision.
While it’s fine to toss out your old shoes, don’t toss your old 401(k) to the wind. After all, it’s your hard-earned money. Just as I had to find the right fit for a new pair of shoes, make sure the option you select is the right fit for you. Know your options and then make a conscious decision to do something about it!