Leave your balance in your old company's plan. If your account balance is over $5,000 your old employer must allow this. If your balance is under this level, they could force you to move your balance. It is always a good idea to contact the appropriate department to learn your options. Reasons that you might want to leave your balance with your old employer include:
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• The plan offers solid low-cost investment options.
• You have a new job and would like to ultimately roll your balance over to your new employer's plan.
Reasons that you might want to consider moving your plan dollars include:
• The plan offers mediocre to poor investment options and charges high fees.
• You have other outside investments and would like to consolidate accounts to facilitate monitoring your investment portfolio.
Roll over your balance to your new company's retirement plan (if allowed). This can be a good option, but you will want to check out the new company's plan first to see if this is your best option. Some reasons to consider this route:
• Your new employer's plan offers solid, low-cost investment options.
• It is an opportunity to consolidate company retirement accounts, giving you fewer accounts to track.
• Depending upon the plan, there might be some advantages to having a higher proportional balance in the plan.
If you are considering this option, it is vital that you do not co-mingle the funds from your old employer's plan with any other account. If you do roll your old account to an Individual Retirement Account (IRA) make sure that this is the only money in that IRA account. You will need to open a separate IRA account to hold the rollover until you can roll it into your new employer's plan. "Tainted" funds cannot be rolled over to a new employer's plan.
Roll your balance to an IRA. This can be a good option for several reasons:
• Generally, an IRA will offer you a greater array of investment options than your retirement plan.
• This will allow you to consolidate these dollars with other investments.
• You old employer's plan is sub-par in terms of investment options and has high expenses.
If you are planning to do a rollover, make sure that you do a trustee-to-trustee rollover. You will want to complete the required paperwork to ensure that your old employer transmits your account balance directly to the IRA custodian (Schwab, Fidelity, Vanguard, or wherever your IRA account is located). This can be done either electronically or with a check made out to the new custodian on your behalf.
You absolutely do not want to take a withdrawal if your intent is to roll this money over. If you do, your employer is obligated to withhold 20 percent federal tax. If you then decide to roll this balance over to an IRA, you will need to add the amount of the tax withheld out of your own pocket in order to avoid being taxed. If you don't, you may also be liable for the 10 percent penalty that comes with most withdrawals before age 59 1/2.
One other note, unless your retirement plan balance is in a Roth 401(k) account, you will be taxed if you wish to convert the rolled-over funds to a Roth IRA.
Withdraw your funds. This is generally a bad idea in most situations. Retirement accounts are always subject to income taxes at ordinary income-tax rates. For example, if your taxable income for the year would normally be $50,000 and you take a $20,000 withdrawal, you will now be taxed on $70,000. Additionally, withdrawals for those under age 59 ½ are generally subject to a 10 percent tax penalty as well. Even if you have a need for the money, your retirement plans should be your last resort.
I see far too many cases of "financial clutter," which arises from people who have switched jobs and have a string of old retirement accounts they are not monitoring. If you are leaving your job, take some time to review your options and make a proactive decision regarding your retirement accounts. This is important to your financial future. Seek the help of a financial professional if needed.
Roger Wohlner , CFP®, is a fee-only financial adviser at Asset Strategy Consultants based in Arlington Heights, Ill. where he provides advice to individual clients, retirement plan sponsors, foundations, and endowments. He recently cofounded Retirement Fiduciary Advisors to provide direct investment and retirement planning advice to 401(k) plan participants. Follow Roger on Twitter and LinkedIn. Roger also blogs at Chicago Financial Planner.