Weighing the Options for Your Old 401k’s
It simply makes sense that your money is in one place.
All of us will encounter life events that will affect our finances. Company or career changes in particular force us to take a hard look at all aspects of our jobs, from salary to insurance to the 401k plan offered by the company. Changing jobs requires tying up loose ends and that includes considering all options with regard to your 401k plan.
The path of least resistance is to just leave your old 401k’s with your employer, if the company actually allows it. Some people may think they are diversifying or emotionally still want to keep ties to an old company, or just plan to get around to moving it someday. But if you leave your company, your 401k should go with you. Otherwise, you would no longer be able to contribute, investment options would be limited and fees could be high, affecting your value.
It may be very tempting to cash out your 401k upon a job change and take a well-deserved dream vacation. But doing so could cause you to retire years later, and what’s worse, is that you will have to answer to Uncle Sam. You’ll likely have to pay an early withdrawal penalty depending on your age plus taxes as well. It’s fine to be emotional about changing jobs, but sensible is better when dealing with your finances.
On another note, it is important to pay attention to the vesting policy within your company. Some companies have a scale that allows employees to keep only a certain percentage of the funds the company has matched. It’s good to be aware of your vesting date and how much of your 401k you will receive upon your departure.
After the start of a new job, your company may offer the opportunity to move old 401k plan assets into the new employer plan. Every plan has different rules, but if you choose this option, you will be again limited by an employer-sponsored plan investment options, which could limit performance, and could pay more in fees.
Now, the reasons for the best option, consolidating all of your 401k’s into one IRA account:
You will receive one statement. It’s simply better to have all of your investments in one place. It makes diversification and ongoing management easier.
You will receive a larger fund selection and advice in a consolidation. Employer plans are very limited while financial institutions have limitless options and financial advisors have research data and advice to help with customized selection.
You may save much more on fees. All mutual funds have ongoing expenses. But you could pay fewer fees and investment expenses in a managed account or by selecting from a wide variety of mutual funds.
You could potentially qualify for penalty-free withdrawals for first-time home purchases and college expenses. In an IRA, there are exceptions for withdrawals for certain needs which can be huge advantages for individuals and families.
Do you have a 401k at a previous employer and want to discuss your options? Click on the button below to request your free 15-minute phone consultation with a Bayntree financial advisor.
Bayntree Wealth Advisors, located in Phoenix and Scottsdale, Arizona, provides comprehensive financial planning and wealth management. The Bayntree team specializes in all aspects of financial health, including retirement planning, risk management, investment advice, tax strategies, estate planning and insurance.
Bayntree does not provide specific legal or tax advice. Please consult with your tax advisor or legal professional for guidance with your individual situation.