If you have recently switched jobs or are recently retired you have to decide what to do with your current retirement account. You may even have more than one account with a past employers. What are your options?
1. Cash Out
If you are still working and under the retirement age, this option should be avoided and only be considered in extreme cases of financial hardship. You will be subject to paying penalties and taxes on the distribution unless you are over 59 1/2 or in some other specific scenarios.
2. Leave it with the previous employer
You can simply leave it exactly where it is. You have to decide if it is worth rolling it over into a new plan or IRA versus leaving it in the current plan.
When to consider leaving it:
The previous plan offers more investment choices of your liking
The previous plan has lower fees
If you're plan was with the employer you just left, whether you quit, fired or were laid off, are 55 or older, and want to access that retirement money penalty free
Why you should consider moving it:
You want the flexibility an IRA has to offer (read below)
You will have more access to capital should you need to take a 401k loan
You want to consolidate accounts - This is a great option if you are someone who constantly changes jobs
The new plan or IRA may have lower fees
Some plans may require you to move your account or charge higher fees to keep it
3. Rollover it over to your new employer's plan
Rolling your prior retirement plan into your new employer's plan is a good option if:
You want to minimize the number of accounts you have open, especially if the plan offers better investment options and has lower fees
You have a potentially larger balance that gives you access to taking a loan from your 401k, up to $50,000.
You can delay the RMD (required minimum distribution) and keep contributing to a 401k if you are over the age of 70.5 and still employed
The downside of rolling over into a 401k versus an IRA:
You may potentially have higher fees
Limited investment options compared to an IRA
Once retired, 401k distributions may be more inflexible than withdrawing from an IRA
4. Rollover into an IRA
Rolling over your prior workplace retirement plan into an IRA may be a good option because of:
Potentially lower fees
Access to more investment options
Flexibility of managing your own investments or working with an investment advisor
Early distributions before 59 1/2 without penalties for first time home purchase, health insurance premiums while unemployed (with certain criteria being met) and qualified higher education expenses
More withdrawal options once retired - Some 401k plans may be inflexible when it comes to distributions when you are receiving income in retirement
You can use your RMD to contribute to a charity tax-free
The downsides of rolling over into an IRA aside from the benefits you may have in using one of the other options are:
You can no longer contribute to a traditional IRA if you are over 70.5 (you can in a 401k or a Roth IRA if you are still earning income)
RMDs are required at 70.5 from a traditional IRA even if you are still working
401k plans typically offer better protection from creditors
In Summary
Whichever option you decide, you may want to discuss your particular situation with a tax professional or investment advisor as each person's needs are unique. If you are retiring soon or switching jobs and want to decide which option is best for you, please contact us.