How to handle an old 401(k)

If you are like many Americans, you probably have money parked in an old 401(k) plan. Perhaps you changed jobs and your 401(k) was left behind, or maybe your employer terminated the 401(k) plan and now you must decide what to do with the money.

But what’s the best way to handle a stagnant 401(k) account? Well, you have options.

Assuming the 401(k) plan is still active – in other words, it’s not being terminated – you can always keep your money in the plan. As long as you have more than $5,000 in your account, your employer, or former employer, cannot kick you or your account out of the plan.

Some people don’t mind leaving an old 401(k) in place, even if they are no longer actively contributing to it. And there’s nothing wrong with doing so. Your savings remain invested and should grow over time.

Others, however, prefer to consolidate and clean up their financial lives in those instances. If that’s your style, there are two other avenues to consider.

First, if you started a new job and your new employer offers a workplace retirement account, you likely could roll over the money from your old 401(k) into the retirement plan sponsored by your new employer. That may be a great option if the new plan has reasonable fees and helpful services. There are no taxes or penalties involved when you roll an account from one 401(k) to another.

Your other option would be to roll the money into an IRA. An IRA functions similarly to a 401(k) in terms of taxation, but you generally have more freedom when it comes to accessing your money. Just like with a 401(k) rollover, there are no taxes or penalties in transferring your account from a 401(k) to an IRA.

With an IRA, you get to choose where to move the money. And if you want the assistance of a financial advisor, you are able to select the right individual to help you manage your money.

Of course, instead of leaving the money in the old 401(k) or rolling it over to a new 401(k) or an IRA, you could instead take a full distribution of the account to yourself. That converts your account into spendable cash, but it’s almost always the wrong move. You are likely to get hit with taxes – and depending on your situation, the distribution could bump you into a higher tax bracket – plus you may get slammed with a 10 percent penalty if you are not 59-1/2 when you take the distribution. You may only be left with 60 percent or 65 percent of the beginning account balance once taxes and penalties are paid.

For most people, a full distribution is a bad idea.

With that said, how do you decide whether to leave the old 401(k) alone or roll it to another 401(k) or to an IRA? There are two overriding factors to consider.

The first is services. You should clearly understand what services you get, and don’t get, with each potential option. Here are a couple of questions to ask. (1) Are the investment options provided to me low-cost and diverse? (2) Will I receive advice on which investments to select? (3) Is there someone I can count on to advise me when the markets get rocky? (4) Will I receive financial planning advice, which would include answers to things like: how much do I need to retire, when should I claim Social Security and how best to withdraw from my various accounts to save on taxes?

The second factor to consider is fees. The key question here is, “Are you getting more in value than you are paying?”

If not – or if you aren’t sure – then forget that option. Finding fees for a 401(k) plan can be cumbersome, but don’t let that discourage you. It’s important to understand exactly how much you are paying for the services you are receiving.

That shouldn’t be too much to ask.

No matter your situation, it’s important you feel confident in where your retirement savings are invested and who you are working with. The money is precious, and you’ve worked hard to save it.

Fortunately, you have options when it comes to handling an old 401(k) plan. The key is finding out which option works best for you and your needs. One size certainly does not fit all.

Justin Lueger is President of Invisor Financial LLC, a registered investor adviser firm in the State of Kansas. All opinions expressed are his own and should not be viewed as individual advice. He can be reached at [email protected]

This column is paid for by Invisor.

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