Do you still have money sitting in a 401(k) with a previous employer?
There are multiple options for this account including rolling the money into your new company plan or IRA. Let’s take a look at the options you have with your account.
Leave the money in the old employer’s plan.
401(k)s [403(b) plans for nonprofits] almost always have limited investment choices, plus both investment and advisor expenses. You can access the fee disclosures, but most never do. If your old plan is under an insurance company, those fees are likely to be higher, as employers typically avoid fees under these providers.
If you reached age 55 in your last year with the company, you’re eligible to access funds without early withdrawal penalties. Consider leaving an amount you might need before 59 ½, which is the penalty-free age for IRAs.
If your balance is less than $5,000, or you reach the plan’s “retirement age” they can force you out of the plan. In either case, be proactive and roll the money to either your current employer’s plan or an IRA.
Move the balance to a current employer plan.
This is usually not the most beneficial move, as you likely have double fees and limited investment choices. However, it could enable you to take a loan from the new plan. 401(k) loan provisions are plan specific, up to $50,000 or 50% of your balance, whichever is less. Payments are with interest, to your own account, and usually through after-tax payroll deduction. If you leave the employer before paying off the loan, you may be stuck recognizing the balance as a taxable distribution.
Take it to yourself as a taxable distribution.
This option may only net you about 55% after taxes and penalties. Remember that retirement plan distributions are taxed as ordinary income, which means it is treated the same as payroll earnings for that year. Unless you need all of it, you’re much better off moving it to an IRA, with the goals of growing it for retirement and taking it gradually over years.
You can “Rollover” the money from a 401(k) to an Individual Retirement Account (IRA)
This is usually your best option. It’s not a taxable event, you’re likely to have much broader investment flexibility and you may have lower overall fees. Look for IRA account “custodians” without annual fees or trading commissions, like most discount brokerage firms. Plus, if you have multiple former employer plans, you can consolidate them into one or more IRAs.
Remember, if you’re between 55 & 59 ½, to leave an amount you might use, as penalties on IRA’s are incurred prior to 59 ½.
Stay tuned to learn more about all of the advantages of rolling the money into an IRA.
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