Opher Ganel, Wealth of Geeks
According to the latest US Bureau of Labor Statistics (BLS) Job Openings and Labor Turnover (JOLT) Survey, over 4 million people quit their jobs in July — the 17th consecutive month this measure has exceeded the pre-pandemic high.
If you count yourself among the many changing jobs this year, don't forget about your 401(k) plan. One study by Capitalize revealed that Americans have lost over a trillion dollars in forgotten 401k plans.
What you decide to do (or not do) with your 401(k) plan when you leave your employer can significantly impact your future finances.
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The potential benefits of keeping your 401(k) at the company you're leaving
There may be several advantages to keeping your 401(k) plan in place with the employer you're leaving.
The most apparent benefit to leaving things as they are is simplicity. You don't have to do anything special; just keep the old plan chugging along as before. That is a plus in itself.
There could be better returns, too. Your old 401(k) plan's investment options may be better than those available in your new employer's plan or through an IRA. Your old plan may offer a free or low-fee advisory service to help you make more informed investment decisions, or the fees may also be lower than your new employer's plan.
If you're 55 or older, and your old plan allows it, you could start withdrawing money without penalty before you turn 59½ under the so-called “Rule of 55.” In addition, money in a 401(k) has better protections against lawsuits than in non-retirement plans or an IRA.
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Reasons you may not want to keep your 401(k) at the company you leave
By contrast, your old plan's investment options may be more limited than those available in your new employer's plan or through an IRA. The fees may be higher than those in your new employer's plan and are almost certainly higher than those of an IRA invested in a “no-load” mutual fund.
Leaving your money with your old plan requires you to track another account in addition to your new employer's plan. And rolling it over into an IRA doesn't reduce the number of accounts. You may also forget the old account and lose all that money, in theory.
In summary, leaving the money where it is may make the most sense for some people, while it would be less than optimal for others.
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The potential benefits of rolling the money over to the new plan
You don't have to worry about losing track of the money, if you roll it over to the new plan. And it's one less account to keep tabs on.
There could be some restrictions on sticking to your old plan. If your balance doesn't meet the old plan's minimum requirement to stay (typically $5000), you can't leave it in the old plan.
And as already mentioned, your new plan may boast better investment options and lower fees than those in your new employer's plan. Also, if the new plan allows it, you could access 401(k) loans. This enables you to borrow money from your account and accrue interest when you pay it back in.
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The cons of rolling over into the new plan
Again, your new plan may have fewer or less attractive investment options and the fees could be heftier. Also, your new plan may not offer the free or low-fee advisory service that your old plan may offer.
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The potential benefits of rolling your 401(k) over to an IRA
For some folks, opting for an IRA instead may be best.
It may be that your new employer's program doesn't accept rollovers. In this case, if you have multiple old 401(k) plans, you can roll them all into the same IRA, or multiples.
You may also not like the old or new plan's investment options. In that case, you may consider what's on offer in an IRA.
Fees are another factor to consider. A no-load IRA may have fewer fees than both your old and new 401(k) plans.
Finally, if your balance is high enough, you may be able to access free or low-fee investment advice from the manager of your rollover IRA.
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The cons of rolling the money over to an IRA
Money deposited in an IRA isn't as well-protected against lawsuits as money in a 401(k). This could be a major issue for some. Also, an IRA is not suited for those looking to get money out of their fund earlier since it never offers the Rule-of-55 withdrawals.
Again, a direct rollover is almost always your best option if you choose this option.
If your old plan was a Roth, you can, and likely should, do the rollover into a Roth IRA to preserve its tax-free status. If you do, it's best to roll it over into an existing Roth IRA if you have one since the 5-year clock until you can withdraw your contributions tax and penalty-free has already been ticking for a while, potentially past the 5-year mark.
If your old plan wasn't a Roth, you may still want to consider converting, and rolling it over into a Roth IRA. This is an especially good move if you expect your income to be lower than usual this year, or you'll end up in a lower tax bracket.
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The bottom line
As the most recent BLS Jolt Survey shows, the millions of Americans choosing to leave their jobs each month likely need to determine what to do with their 401(k) plan.
Having a balance in an old employer's 401(k) plan is, obviously, better than not having it. If it does exist, you need to choose whether to keep it there, subject to a minimum balance requirement; roll it over into your new employer's 401(k) plan or an IRA; or potentially cash out that balance.
The choice you make could be a big difference to your savings over the long run, so contact your accountant and financial planner to make the best-informed decision possible.
