Changing jobs brings many questions when it pertains to what you should do with your 401k account. Should you roll it over to an IRA? Cash it out? Or roll it into your existing plan?
I recently had an appointment with a client that was dealing that very issue. The client has a 401k with a well known company at his previous employer and had just started a new job. Out of coincidence, his new employer's 401k was also with the exact same company. While that may seem like a slam dunk, we still wanted to explore what was the best option for him. Here's a rundown of some of the questions that I asked that ultimately led as to why it made the most sense to rollover his old 401k into his existing one.
How Good are the New Investment Options?
Just because it's easy to roll your old 401k into your new one doesn't mean you should if your investment choices suck are less than favorable. Take some time and get a list of what your options are. If the returns are inconsistent or the fees look too high, then opt to roll your 401k into an IRA and manage yourself or hire a financial planner.
How Much Do You Plan to Defer?
If your goal is defer as much money pre-tax as possible, then opt for the 401k vs. IRA. In 2010, you're allowed to defer up to $16,500 ($22,000 if over 50) into a 401k which easily trumps the $5,000 ($6,000 if over 50) that the IRA will allow you to defer.
Do You Love the Roth?
How do I love thee? Let me count the ways.
Never thought I would quote Shakespeare while discussing the Roth IRA, but that's how much I love it! If your employer offers a Roth 401k, you should look into using it if you don't need the current tax deduction you would get from contributing to a traditional 401k. You won't be able to roll your old 401k into a Roth 401k, but you can start adding new money into it.
Each person's situation is different. Please talk to a financial advisor and tax advisor for advice on your specific situation.
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Will You Need to Take a Loan?
The couple I was helping were considering taking a loan on their 401k for some home improvements. If they had rolled it over into an IRA, taking out a loan wouldn't have been an option. (Without having to repay it in 60 days). A 401k gives the employee an option to take a loan against their 401k balance, only if the 401k allows it. Your 401k does not have to allow a loan provision and after calling the 401k company for my clients, we found out that theirs does not.
Is There a Match?
Whether your 401k has a match or not doesn't really affect whether you should you roll your old one into or not, but it is good to know when you start adding money into it. A 401k that offers a match is one of the rare times that you actually do get a “free lunch”.
The Rollover Process
If you decide that rolling into your existing plan makes sense, here's the process that you'll have to follow.
- You have to find out if your existing employer will accept 401(k) rollovers. Most of the time I see this to be the case, that the existing employer will accept rollovers from old 401(k)s. However, I have run into a few instances where the plan didn't allow it. The easiest way to find out is to either double check with your human resources department or call your existing employer's 401(k) custodian and they'll be able to let you know what the rules are on your current plan.
- Request paperwork. Once we made the phone call, we learned that we had to receive an enrollment kit in the mail. The enrollment kit would then give us the option to choose our new investment selections for the existing plan and instruct what percentage we would be deferring from our paycheck.
- Sign Up For New 401k. You'll need to go to your HR department and sign up for your new 401k. Don't forget to have your beneficiary information readily available.
- Mail Check to New 401k Custodian. Since we were moving from one 401k to another 401k in the same company, I was under the impression that they would be able to transfer the money pretty easily. It was still easy, but they had to mail my client the check and then my client had to turn right around and mail the check back to them to be deposited into the 401k. Did I think that was silly? Absolutely. Despite the little hiccup, we were able to accomplish what we wanted.
Meet With a Professional
If you're unsure what the right move is for you regarding your old 401k, take some time and meet with a financial planner to assist you in the process. I promise you that its a painless process and worth your time to get you better prepared for a successful retirement.