The average person will change jobs 12 times during their working life according to US Department of Labor statistics. Often, this means we are leaving an old retirement plan behind. But how do we decide what to do with that savings? Certified financial planner Suzanne Himes, with Asset Planning Corporation, discusses some of the pros and cons of a 401(k) rollover.
SUZANNE, THIS SEEMS LIKE IT COULD BE A COMPLICATED DECISION, IS THAT TRUE?
It really can be, because there are a number of questions to ask. So, it’s helpful to have a framework to organize those questions. Keep in mind there are basically four options:
- Leave the 401(k) in old employer plan
- Roll the money into a new employer’s plan
- Roll the money into an IRA
- Cash out – not recommended
SO WITH THAT IN MIND, WHAT ARE SOME OF THE FIRST THINGS WE SHOULD CONSIDER?
At a high level, we should be asking ourselves if that old plan is well managed and also meeting our needs.
Three questions to ask:
- Cost and quality of investment options?
- Compared to new employer plan or an individual retirement account
- Outstanding plan loans?
- If rolled over, loans will need to be repaid in full by your tax return deadline
- Income needs?
- Are you under or over age 59 ½ ?
Then we can drill down a little deeper.
THAT MAKES SENSE, WHAT ARE SOME EXAMPLES?
- If under age 59 ½ and income is needed:
- If over age 55, can take penalty free “separation from service” distributions from a 401(k). If in public service it’s age 50
- Or, roll to an IRA and take 72(t) distributions without penalty (“substantially equal periodic payments”)
- Some other important considerations:
- Does the 401(k) account hold company stock? If so, there are special tax treatments available that must be considered BEFORE a rollover.
- IRA rollover funds need to be kept in a separate account if you think you might want to move them into a future employer plan.
FAST MARKET FACT: THE JANUARY EFFECT
- A perceived seasonal increase in stock prices during the month of January.
- From 1928 through 2019, the S&P 500 rose 62% of the time.
- Often attributed to the increase in buying that follows typical year -end sell offs; investment of year-end bonuses
Download the 401(k) Rollover Decision Flowchart from our Free Resources page!
Want to learn more about 401(k)’s? Do you have other general questions about financial planning or investing? Send your questions to our Knoxville Certified financial planners or directly to firstname.lastname@example.org!