What Should You Do With Your Old 401(k)?

Regardless of your reason for leaving a job—whether it’s taking a new job, getting laid off, retiring or leaving the workforce temporarily—you will have to make a decision about what to do with your 401(k) account at your former employer. In general, there are four main options:

1. Take the money as a distribution.This is usually the least attractive option for most people, because the money will be subject to federal and state income taxes at ordinary rates, as well as a potential early distribution penalty if you are under age 59½. In fact, your previous employer is required by law to withhold 20 percent of your plan balance for the payment of federal taxes.

Even worse, taking the money now may seriously impact your ability to retire down the road. While taking possession of what might be a large sum of money in order to buy a new boat or take a vacation might be tempting, this is not usually a smart way to build your retirement nest egg.

2. Leave the money in the former employer’s plan.Depending on the plan, you might be able to just leave the money where it is. The benefit of this option is that you won’t be assessed any taxes or penalties, and the money may continue to grow for your retirement.

There are potential drawbacks to this option. Your investment options are limited to those offered by the particular plan. In addition, money might end up “out of sight, out of mind”—especially if you have changed jobs several times. It can be difficult to keep track of and manage money that is left behind in multiple previous employers’ 401(k) plans, which can negatively impact investment performance.

3. Transfer the money into your new employer’s 401(k) plan.If your new employer offers a 401(k) plan, you may be able to transfer the money from your former employer’s plan into this plan. You should investigate your new employer’s plan carefully, including any potential fees and the number and variety of investment options that are available.

4. Rollover the money into an Individual Retirement Account (IRA).This is often the most attractive option for many individuals. In many instances, it provides the most flexibility and control, since IRAs may offer more investment options than 401(k) plans. And there are no tax implications with traditional IRA rollovers, although there may be tax implications when rolling over 401(k) funds into a Roth IRA.

The first step is to open a new IRA if you don’t have one. Choose a financial institution or investment companythat offers a wide range of investment options, to make it easier for you to invest according to your overall asset allocation plan.

Next, inform your former employer that you want to transfer your 401(k) funds into an IRA.Important: Be sureyour employer makes the check payable to the investment company, not to you personally, in order to avoid the automatic 20 percent withholding requirement. This is referred to as a trustee-to-trustee transfer.

Once the transfer is complete, your money will likely be moved into a low-interest money market account. So the final step is to invest the money in accordance with your asset allocation plan. Each individual’s asset allocation plan will be different, based on his or her investment goals, time horizon and risk tolerance, among other factors. An investment counselor can help you determine what kind of investments will best fit your goals.

To learn more about 401(k) rollovers, please contact David Lerner Associates at (877) 367-5960.