One of the most common financial questions people ask me goes something like this: “I used to work for <insert name here> and I had a 401(k) there. I left my job but never did anything with my retirement account. Should I just leave it alone or do I have other options?”
If this sounds familiar, then this article is for you.
There are four basic options that exist for former employees when it comes to their 401(k)/403(b) accounts:
LEAVE IT ALONE
Pros: It is very easy to do because it does not require any action. Your account maintains its tax deferred status.
Cons: Most company sponsored retirement plans offer a limited menu of investment options and provide very little flexibility in the event that a non-spouse beneficiary is named. You may lose the ability to receive loans.
TAKE THE CASH!
Pros: The advantage here is that you will have a sum of money available to go purchase that shiny new car or house. Sounds great, right? Well, the only issue is…
Cons: This type of distribution will be taxable as ordinary income and an additional 10% penalty is assessed if the individual is under the age of 59 ½ years old. I am not the smartest man in the world, but I do know that most people do not want to pay any unnecessary tax to the IRS.
ROLL IT OVER (IRA)
Pros: By rolling over the balance of your old retirement account into an IRA, you assume complete control over the money. You will have access to more investment options and your beneficiaries will enjoy additional protection. Furthermore, it is a “non-taxable event” which means your money will continue to grow tax deferred until withdrawn from the IRA.
Cons: You cannot take a loan.
ROLL IT OVER (New employer plan)
Pros: You can roll your assets into your new employer’s plan. It is a non-taxable event, which means that your money will continue to grow tax deferred until withdrawn. Your new plan may offer more attractive options and you can consolidate your assets into one account.
Cons: Your old plan’s investment options may be more suited to your needs and offer more flexibility than your new plan which may have limited options.
When considering the differences between option 1, option 3 and option 4 (you didn’t consider option 2, right?), think about the last time you dined at a fast food establishment. The menu probably offered something like hamburgers, cheeseburgers, and chicken nuggets with a side order of french fries or onion rings. What if you wanted a hot dog or a taco accompanied by a nice shake or smoothie?Out of luck. That is a company sponsored retirement plan – limited options that may not be tailored to your situation.
The alternative would be to invite a private chef to your home and ask them to prepare a specialty dinner for you. You could tell the chef what you are allergic to and what types of food you prefer, and they can create a dinner just for you. This is analogous to a Rollover IRA where you and your advisor can choose investment options that fit your objectives and risk tolerances.