Congratulations! You’ve accepted a new job with a new company. That means a new boss, new coworkers, and new benefits. And maybe even a new 401(k) plan. So now the question is “What to do with your 401(k) with your previous employer?” You’re in luck. We have some answers. Three of them, in fact.
A closer look at your available options
The good news is whatever money that’s in your 401(k) is yours to do with as you like. But when you no longer work for a company, any retirement accounts you have through your former company might need to be moved to your new employer. Or you may need to roll it over or into a brokerage account that you own completely.
Option 1: Leave your money where it is
Usually, if your 401(k) has more than $5,000 in it, most employers will allow you to leave your money where it is. If you’ve been happy with your investment options and the plan has low fees, this might be a tempting offer. Before you decide, compare your old plan with any retirement plans offered at your new job or with an IRA of your own.
Your new employer-sponsored plan might have more limitations on it than your previous plan or other available options. Maybe there are fewer investment choices/options. Maybe it doesn’t have an employer match or higher management fees. So you’ll want to look closely.
Also consider how often you tend to stay at jobs. If you change jobs every few years, you could end up with a trail of 401(k) plans at all the different places you’ve worked. Consolidating might be easier in the long run.
Option 2: Roll it into your new 401(k)
If your new employer offers a 401(k), you can possibly roll your old account into the new one. You may be required to be with the company for a certain amount of time before you’re eligible to participate in their plan.
You can choose to do a Direct Rollover, whereby the administrator of your old plan transfers your account balance directly into the new plan. This only requires some paperwork.
Or, you can choose an Indirect Rollover. With this option, 20% of your account balance is withheld by the IRS as federal income tax in addition to any applicable state taxes. The balance of your old account is given to you as a check to deposit into your new 401(k) within 60 days. There is one catch, though. You’ll need to deposit the entire amount of your old account into your new account, even the amount withheld for taxes. That means using personal cash to cover the difference and waiting until tax season to be reimbursed by the government.
Option 3: Roll it into an IRA
If your new employer doesn’t offer a 401(k) or you don’t like their option, you can roll your 401(k) into an IRA.
Rolling over accounts is easier than it sounds. You may need to open an IRA at a brokerage company and sign a few papers that allow the brokerage to transfer the money into your new account. This option will help keep your balance growing tax deferred (if it’s a Traditional IRA) and you can continue to make tax-deferred contributions.
It’s your money, and your choice
When it comes to what to do, there are advantages and disadvantages to all options so there’s no one right answer for all. You need to review your options and choose what’s best for you and your retirement. Retirement savings is one of the most important and long-lasting investment decisions you’ll ever make. If you’re not sure what to do, you always have the option of talking to an advisor. Whether you need a bit of advice or a comprehensive financial plan, a Certified Financial Planner can help guide you in the right direction.
Financial planning and investment advice provided by John Hancock Personal Financial Services, LLC (“JHPFS”), an SEC registered investment adviser. Investments: not FDIC insured – No Bank Guarantee – May Lose Value. Investing involves risk, including loss of principal, and past performance does not guarantee future results. Diversified portfolios and asset allocation do not guarantee profit or protect against loss. Nothing on this site should be construed to be an offer, solicitation of an offer, or recommendation to buy or sell any security. Before investing, consider your investment objectives and JHPFS’s fees. JHPFS does not provide legal or tax advice and investors should consult with their personal legal and tax advisors prior to purchasing a financial plan or making any investment.