Gone are the days when pensions were a part of life. Today no one thinks twice about taking advantage of a new career opportunity. But too often, along with old condiments and clutter, we also leave behind our 401(k)s.
Taking it with you typically involves rolling a former company plan’s holdings into the retirement plan at your new company or into an Individual Retirement Account (IRA). In fact, some folks may have more than a few straggling 401(k) accounts, which begs the question: Is it ever too late to roll? The short answer: No. But there are some tax-sensitive considerations to keep in mind.
Reasons to Roll Your 401(k). For administrative ease, retaining financial control, and exploring potential new investing opportunities, it may make sense for some investors to consolidate old 401(k) accounts (or the public-employee equivalent) into an IRA. This is especially true if you can’t roll funds to a future employer’s 401(k) plan (not all allow it). Also, many IRA firms offer calculators and guidance on investment strategies designed to help you make the most of the rollover from the onset.
Where to Start? If you’re just leaving a job, information will be readily available. But if it’s been a little longer, it may require some detective work. Try to dig up an old statement where you’ll likely find the name and contact information of the plan administrator. Keep in mind plan management can change hands. If you’re not sure, contact your former company’s human resources department—they can help. To do them and yourself a favor, have the dates of your employment at the ready (Social Security number, too).
Have patience. Industry consolidation, relocations, etc. may make finding this information a little tougher in some cases. If necessary, you could uncover an annual federal filing “Form 5500” that requires companies to record employee retirement plans, through the Department of Labor. But try not to be overwhelmed. Remember, IRA custodians are on your side because they want your business. Many will help you with the paperwork and help you make contact with the old plan administrator. Some even offer cash incentives for the roll.
Think About Fit. Rollover choices might include a traditional IRA or a Roth IRA. A traditional IRA can enable your investments to continue to grow tax deferred, since you won’t pay any taxes until you pull funds out of the IRA. If you roll over and convert your 401(k) into a Roth IRA, the tax bill hits with the conversion, but you still benefit from tax-free income in retirement. Another thing to consider, unlike a traditional IRA, there are no required minimum distributions (RMDs) for a Roth IRA. You can also weigh a conversion between a traditional IRA and a Roth IRA down the road.
When to Leave it Be. It’s a legitimate question: Is there any reason to keep an old 401(k) untouched?
If your existing 401(k) account includes company stock, you might prefer to hang on to that particular investment inside your 401(k). Otherwise, you could lose certain tax advantages on the company stock if you roll it into an IRA.
You might also want to keep a 401(k) if the plan offers lower cost investment options or privileged access to a distinctive investment. One example is a stable-value account, a fixed-value fund that pays out on an increasing scale if interest rates rise. Stable-value accounts rarely appear outside retirement plans, so if yours has one, or another unique offering—say one that’s institutional-class—you might consider keeping it.
In addition, as is typically the case, you may have the option to take loans from your 401(k) accounts, but traditional IRAs don’t have the same loan opportunities.
Don’t Grab and Go. It may be tempting to reward yourself for the new job by cashing in on this “new-found” money from an old 401(k), but most advisors warn against this.
Yes, it’s your money. And if there’s some emergency demand for cash that cannot be solved elsewhere, then maybe you should consider it. But you’ll be slapped with a mandatory 20% withholding for federal taxes, plus potential state and local taxes. Plus, if you’re under age 59 1/2, your assets will also take a 10% hit for early withdrawal except under certain specific exceptions.
When all is said and done, whatever you decide to do with your 401(k), it’s worth it to take one last look at the remnant of a job past. After all, taking control of your old accounts today can help with your financial future. There are online tools and resources that can help you decide the right move for you.