401k Rollover Options
Last December, when I left my previous employer to start my own business, I had an important decision to make on what to do with my existing 401k. Luckily, being a financial planner, I knew exactly what I was going to do, but many others that are not in the profession or really don’t have a good grip on their financial situation might not be as fortunate. When changing jobs, the decision that you make to do with your 401k could be a costly one if the wrong decision is made. It’s important to know the different options that you have on what to do with your 401k whenever you leave your current job.
Cash Out 401k
The only reason that I have this option here is because you would be surprised the amount of people I talk to that elect this option. The most common reasoning I here, especially for 401k plans that have matching, is that it’s “The company’s money” not “theirs“. Wow! Isn’t that great reasoning?
By taking “The company’s money”, now that person is stuck with a 10% early withdrawal penalty plus ordinary income tax. Typically, when you cash directly from your 401k they will hold 20% standard plus the 10% early withdrawal penalty. Obviously, this was not the direction I was going to go.
Leave the 401k There
My previous 401k at A.G. Edwards & Sons was one of the best around. I don’t think I’ve seen another that had such a wide array of solid investment choices. I guess one could have made the argument to leave it there, but considering my circumstance, that probably wasn’t the best idea. Considering I was leaving to work for a competitor, LPL Financial, it definitely made more sense to take it with me.
I have heard of instances where people have left their 401k’s with their previous employers and have had difficulty trying to get access to the funds after a significant period. The likelihood of this increases if your previous employer comes under financial duress or merges/gets bought out by another company.
Transfer The 401k to a New Employer
Most people have the option to transfer there old 401k into their new 401k with the new employer. In the past, this used to be more difficult, but with recent government regulation changes, it’s much more easy. While this could be a good decision, a lot depends on the new options that are in the new 401k.
In my case, since I was essentially starting my own business, this was not an option for me. What did I do? Read on to find out…..
Rollover Your401k Into Your Own IRA
Rollover into IRA
I would argue that this would be the most advantageous thing to do. By rolling over your 401k into an IRA, you will further diversify from your new plan, meaning that you can utilize different investments options that complement what you would have in your new plan going forward. In addition to that, you also have full control on the investment decisions inside the plan whereas in a 401(k), you are limited. You have full reign to make all the decisions that you want and you may even seek the counsel of a financial advisor to help direct you in what investment direction that you would go.
Other Good Reads:
- Here what Patrick from Cash Money Life did when he was faced with a similar situation.
- Doing so in a treacherous market could be tricky. Check out Consumer Commentary’s take.
- Similar steps at Smart Money Life: 401k Rollovers
- At BluePrint For Financial Prosperity, a reader was wondering if now was the right time to do rollover their 401k. Somebody very wise left a great comment…
Securities offered through LPL Financial, Member FINRA/SIPC
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Nice writing. You are on my RSS reader now so I can read more from you down the road.
Allen Taylor
Unless your old plan is incredible for either choice of funds or low expense ratios, then rolling your 401k into an IRA is probably the way to go. That way you have more control over your investment choices.
Patrick’s last blog post..Self-Employed Retirement Plans: Keogh Plan