When to go and when to stay
Should you leave your 401k funds at your old employer?
If you have recently started at a new job, especially in these times, the last thing that you might be thinking of is your old 401k from your previous employer. The good news is that there are several options for you, and the even better news is that you don’t have to make any decisions right away.
If you have more than $5,000 vested in your company’s 401k plan, most employers will allow you to leave it in their plan. The term “vested” is used to categorize the funds that the company has put into your 401k for you, like a company match or a bonus. It does not include your contributions that have been withheld from your paycheck. After you have been employed for a specified amount of years, the contributions that the company has made will permanently become yours; at which time you will be fully vested.
Anytime after your employment ends, you can do one of three things:
Roll the funds over into a new employer’s 401k plan:
Pros:
· You would have the same ERISA protections that you got from your old plan. While ERISA doesn’t guarantee that you won’t lose money, it does have strict regulations for plan management, protection from creditors, and vesting.
· You will be able to continue adding your own contributions to the plan.
· If you don’t have any outside investments, rolling it into your new employer’s plan will allow you to skip hiring an investment advisor or managing the IRA yourself.
Cons:
· You are still constrained to the limited choices offered by the plan provider. You won’t have any say over the investment options or fees.
· Some employers offer time with an investment advisor as a perk of employment. The advisor can help guide you on which of the available securities in the plan you should choose, given your age, goals, and risk profile. A lot of employers do not. This means that you will have to make those choices on your own. Make sure to ask if this is something that your company offers.
Rollover your old 401k into an IRA:
Pros:
· When you work with a reputable advisor, not only can you trust their advice, but their fees should also be transparent and straightforward.
· You have a wide array of investment options, which allow you to diversify and make a plan according to your specific needs and goals.
· Those who are investment savvy can use one of the many platforms available to manage an IRA themselves.
· Condensing several old 401k accounts into one IRA can give you a better picture of where you are at financially.
· 401ks don’t typically have good, conservative investment choices. You are bound to your employer’s investment options. This can be challenging if you are approaching retirement and looking for secure investments like CDs or individual bonds to keep your assets safe.
Cons:
· It can be time-consuming to find an advisor. While the right advisor will help you with your retirement and personal investments, it may take an extensive search and multiple interviews to find the one that is right for you.
· ERISA protects your 401k from creditors (except the government and IRS), but not every state gives that level of protection to IRAs. You should check the laws in your state.
Nothing: If you have more than $5,000 vested in your previous employer’s plan, most companies will let you leave it there.
Pros:
· You don’t have to do anything at all. You will still receive all the same statements and updates as before. You will be able to change and rebalance the investments as needed.
· If you are leaving a large company with a well-established 401k plan, you can expect that you will have the same experience going forward.
Cons:
· You can’t add any more funds. If your new employer doesn’t have a 401k or has a long wait period until you can join, you will have to open an IRA to put away funds for retirement.
· You are putting a lot of trust in a company you no longer work for. Your funds are protected by ERISA, so you don’t need to worry about losing the money. You do need to worry about losing touch with them though (i.e. forgetting that you have an old account and not updating it).
· Since the company chooses the 401k provider and the securities that participants are allowed to invest in (which is normally a limited selection), you are trusting that they will pick investments that will perform in line with their benchmarks, as well as charge a reasonable fee.
Things to keep in mind:
If your new employer offers a “company match”, where they match your contribution in any way, you should definitely take advantage of that. This is free money that the company gives you as a reward for your service. So, even if you decide to roll over your old 401k into an IRA, you should plan to maximize the benefits offered by your employer.
There may be a waiting period to sign up for your new employer’s retirement plan. If you want to continue contributing to a retirement plan while waiting, you should open an IRA, even if you decide to roll over your old 401k into your new 401k. This will allow you to still set aside tax-deferred funds toward your retirement, in the meantime.
If you choose to roll over your 401k, make sure you have spoken to both your old 401k provider and your new one (employer or IRA). Every plan provider is different in how they do rollovers, so you want to make sure that you understand what the process is. Some will only send you a check, while others will send a check directly to the new provider. Since you only have 60 days to get the funds deposited in the new account, before it becomes a distribution that’s taxable to you, make sure that you know what you need to do before starting the process.
Remember, there is no pressure to decide what you would like to do with your previous employer’s 401k. If you have more than $5,000 in it, you can leave it there as long as you need to make your decision. Once you start the rollover process, you then have 60 days to get it into a new 401k or IRA account. If your account is less than $5,000, they may set up an IRA for you or issue you a check.