At some point in your career, chances are, you may decide to leave your current employer for a better opportunity or to finally decide to work for yourself. If you have participated in an employer’s 401k, you may be wondering if you should take your 401(k) with you – a fiduciary can help.
The fact is you may only have 4 choices available once you change your place of employment. You could cash the account in full, take the account with you to your new employer, keep the account where it currently is, or roll the account to an Individual Retirement Account (IRA).
Let’s look at each choice individually:
- Taking a full distribution in cash is not advisable. The purpose of having a retirement account is to allow the balance to grow tax deferred until retirement. Taking a full distribution stops the tax deferral and makes the balance subject to being fully taxable.
- Taking the 401(k) to your new employer assumes they offer a 401(k). Your balance would be subject to the new plan’s investment choices and withdrawal rules. Rules for withdrawals within 401(k)s in general are rather stringent. Access to funds prior to age 59 1/2 can be limited to separation of service, plan termination, or death.
Keeping the account with your prior employer may not seem like a bad option until you read the next alternative. It’s worth noting that 401(k)s have internal fees that bite into your balance year over year. These fees are generally administrative and over time can really add up.
Rolling your 401(k) to an IRA allows an individual to take control of the direction of the account in terms of investment choices, strategies, time horizons, etc. Withdrawal options for IRAs are much more lenient. For many, administrative fees for IRAs can be near zero. Utilizing an IRA makes it possible to consolidate all 401(k)s that someone may have accumulated over the years, making it easier to manage and potentially grow assets more efficiently.
As a side note, by utilizing a Rollover IRA, an individual may look into the option of converting to a ROTH-IRA at some point in the future. ROTH-IRAs offer tax free withdrawals in retirement, helping with funding future income needs. Please consult a CFP® for more details.