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Handling a 401k account from a former employer

More often than not, moving on from a job is a big and difficult decision to make. This decision is only made more complicated if you have a 401k account with your former employer and don’t know what to do with it.

To make it simple, you have four options regarding the 401k account you’ve accrued at a previous employer.

Option 1 - Leave the account where it is

The simplest option is to do nothing and leave your 401k account with your previous employer. Though, if your account balance is below a certain threshold, your previous employer may choose to distribute the funds to you by placing the funds in an IRA or simply cashing you out.

Note: This does not limit you from opening a new 401k account with your new employer.

There are several potential reasons to leave your 401k with your previous employer, like having a low cost for certain investments or others that have limited availability outside of your previous employer’s plan. Other reasons might include maintaining creditor projections unique to qualified retirement plans, or retaining the ability to borrow from the account if the plan allows for loans to be distributed to ex-employees.

The largest downside to leaving your 401k account with your previous employer is that you may lose touch with the account. Not only do you run the risk of paying less attention to how the investments are being managed, but you also might forget the account even exists.

Option 2 - Roll the account over to your new employer’s plan

If your new employer’s 401k plan has a more competitive and robust investment menu, and assuming that your current employer’s 401k plan accepts rollover contributions from your previous employer, another option is to consider rolling over the funds to your new plan. This would offer a much better position for you while making a full break with your previous employer.

The biggest benefits to rolling over your previous 401k contributions are conveniently consolidating your assets, retaining strong creditor protections, and keeping the assets available with your new employer’s 401k plan loan features.

Option 3 - Roll it into a traditional IRA

A third option is to roll over your 401k account into a traditional individual retirement account (IRA). This IRA can be new or existing. Individuals often opt to roll their 401k into a traditional IRA to gain some investment choices that don’t exist in their new employer’s 401k plan. If you are unfamiliar with traditional IRA’s and their benefits/drawbacks, consider meeting with a professional to ensure you are making the best move with your money and your future.

Some immediate drawbacks to this option includes having less creditor protection and the loss of access to 401(l) loan features.

Note: Do not rush important financial decisions. Take your time, consider your options, and speak with a professional to answer any questions you may have and prepare yourself for your financial future.

Option 4 - Cash out

The final option is to cash out of the 401k account, though this is not recommended. Cashing out of a retirement account has several negative consequences including tax repercussions and opportunity cost.

If you opt to cash out, you’ll have to pay a 10% early withdrawal penalty (assuming you’re under the age of 59½) on top of ordinary income tax on the account’s balance. In addition to this, your previous employer might hold onto 20% of the account balance to prepay the taxes owed.

The opportunity cost of cashing out of a retirement account early is more than you would expect. If you take $10,000 out of a 401k instead of rolling the funds into a new account, this could leave you $100,000 short after just 30 years.

You don’t need to rush into a decision right away. It’s best to take your time and find the best option for you and your future. Reach out today and we will help you find the best route possible.