Perhaps you are retiring or perhaps you are moving on to another opportunity.  Whatever the reason, there are many things to do when leaving a job.  Don’t neglect your 401(k) plan during this process.

With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation.  Here is a discussion of several and the pros and cons of each.  Note this is a different issue from the decision that you may be faced with if you have a defined benefit pension plan.

Leaving your money in the old plan 

I’m generally not a fan of this approach.  Over the years I’ve worked with several clients who have had several 401(k) accounts that have been left with old employers.  All too often these accounts are neglected and add to what I call “financial clutter,” a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to a solid menu of low cost institutional funds.  In addition many of these plans tend to be among the cheapest in terms of administrative costs.  If this is the case with your old employer’s plan, it might make sense to leave your account there.  However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Unfortunately far too many lousy 401(k) plans are filled with high cost, underperforming investment choices and leaving your retirement dollars there may not be your best option.

Rolling your account over to an IRA 

As a financial advisor I generally suggest this route to clients who are leaving their employer and for those with a collection of old 401(k) accounts still with the plans of their former employers.  This not only allows for the consolidation of accounts which makes monitoring your portfolio easier, but as an advisor I often have access to a wider range of low cost investment options than might be available to them via their old employer’s plan.

Even for do it yourselfer investors, rolling over to an IRA is often a good idea for similar reasons.  You will want to take stock of your overall portfolio goals in light of your financial plan and determine if the firm you are using or considering to house your investments offers appropriate choices for your needs.

Rolling your account into your new employer’s plan 

If allowed by your new employer’s plan, this can be a viable option for you if you are moving to a new job.  You will want to ensure that you consult with the administrator of your new employer’s plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don’t have significant outside investments.  It might also be a good option if your new employer has an outstanding plan on the order of what was mentioned above.

Before going this route you will want to check out your new employer’s plan.  Is the investment menu filled with solid, low cost investment options?  You want to avoid moving these dollars from a solid plan at your old employer to a sub-par plan at your new company.  Likewise you don’t want to move dollars from one lousy plan to another.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan.  Given the potential tax consequences I generally don’t recommend this route.  A few additional considerations are listed below (I mention these here to build your awareness but I am not covering them in detail here.  If any of these or other situations apply to you I suggest that you consult with your financial or tax advisor for guidance.):

• The money coming out of the plan is always taxable, except for any portion in a Roth 401(k) assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
• You will likely be subject to a penalty if you withdraw funds prior to age 59 ½ with some exceptions such as death and disability.  There is also a pretty complex method for those under age 59 ½ to withdraw funds and avoid the penalty called 72(t).
• If your old plan offers a match there is likely a vesting schedule for their matching contributions.  Your salary deferrals are always 100% vested (meaning you have full rights to them).  Matching contributions typically become vested on a schedule such as 20% per year over five years.  You will want to know where you stand with regard to vesting anyway, but if you are close to earning another year of vesting you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
• If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date.  As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
• Another factor that might favor rolling your old 401(k) to your new employer’s plan would be your desire to convert Traditional IRA dollars to a Roth IRA now or in the future.  There could be a tax advantage to be had by doing this, however please consult with your financial advisor here for guidance tailored to your unique situation.
• If you are 70 ½ or older and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company.  This might also be a reason to consider rolling your old 401(k) to your new employer’s plan, again consult with your financial advisor.

There are a number of options for an old 401(k) or similar retirement account when leaving your employer.  The right course of action will vary based upon your individual circumstances.  The wrong answer is to ignore your this decision.

Please feel free to contact me with questions about a 401(k) rollover or about your overall financial planning needs.

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