Moving On? Don’t Leave Your 401 K Behind
by Sarah Johnson, CFP®
The average American now changes jobs every 4.2 years, yet many are not just leaving their jobs behind, but are also leaving their 401K with their previous employer. While leaving your funds put may be the simplest solution at the time, it can be detrimental to your retirement picture. 401k plans, especially ones that offer a match, can be a useful tool to save for retirement, however, they are not perfect vehicles. Not only do 401k plans often carry various fees not always understood by the investor, but due to compliance issues the investment offerings within 401ks leave much to be desired. Most 401K companies have a “less is more” attitude, severely limiting your investment options, making it difficult if not impossible to invest in your best interest. For their own protection, they often subtly push investors to select Target Retirement Funds, a much simpler option for investors and one which gives the Benefits companies legal cover. The problem is that simplicity may or may not work to the long-term benefit of the investor. These issues are why it is important that when you leave a company, you leave your 401k plan as well. So, if you shouldn’t leave your 401k plan where it is, what should you do with it? When you leave a company, you have 4 options for your 401k funds, only one of which we recommend in most situations.
- Stay Put: Keep your funds in your 401k (not ideal): While this is the most convenient in the short term, each year Americans lose track of billions of dollars in old retirement accounts they forgot how to access. Even if you manage to keep track of your various accounts, your 401k investment options are limited, and no active management of your funds is occurring.
- Roll your funds over to another company’s 401k (not ideal): While this would help with the tracking issue of option #1, in this plan you’re simply moving from one poor investment platform to another as your investment options remain limited.
- Cash out your 401k (not ideal): Cash-out withdrawals are considered income, triggering state & federal taxes, and depending on your age, could trigger a 10% penalty in addition to taxes.
- Roll your 401k into an IRA (ideal): A 401k Rollover to an IRA is considered a non-taxable event, meaning you owe no taxes at that time, and your investments can continue to grow tax-free. You will have superior investment options in your IRA compared to what you had in your 401K, and you will likely be paying fewer fees.
Bottom line: Moving your 401k to an IRA when you leave a company brings with it many advantages, however, make sure to do your due diligence to find an advisor or IRA provider who promise low expenses, and if you need it – active management, as this too will be crucial for your long-term success.
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