If you leave your company, what do you do with your 401k?
You have a few options for your 401k if you are separated from your company. There are advantages and disadvantages for each option. We will discuss the pro’s and con’s below.
1. You can leave the account in place to grow.
2. You can rollover your old 401k to a new 401k.
3. You can rollover your old 401k to an IRA.
I have had a few instances of leaving the old 401k in place as I was happy with the tools, investment options and rate of return I was experiencing. I was also a little lazy about transferring the money. Some 401k providers make it difficult to move the money as you get bogged down with paperwork. Some also require your spouses signature and Notary stamp before you can start the transfer. If you do leave your old 401k in place, keep an eye on the fees. Fees can increase over time and can often be much higher to begin with. In most cases you will also no longer be able to contribute to your old 401k.
A rollover of your old 401k to new 401k can have a few benefits. You are able to manage your money easier using a single platform, and you get the added psychological benefit of looking at a bigger number each month. Again, beware of fee’s as your new provider may have higher fees than the old 401k provider. Also, make sure you are happy with your investment choices. Some 401k providers only provide a limited number of investment options to choose from. Choose wisely.
The most popular option is to rollover your 401k to an IRA. Since your 401k is made up of pre-tax dollars, you will want to open a traditional IRA to transfer your money into. These dollars will continue to grow in a tax deferred manner, just as your 401k has grown. As long as your funds are deposited within 60 days to the IRA, you will not pay any taxes or penalties at the time of transfer. Most all brokerage firms offer a traditional IRA. These accounts also offer the most flexibility in terms of investment options and can provide very low fees. In some cases, no fees at all.
For rollovers, there are two types to be aware of, the direct and indirect rollover. If your account providers have a direct rollover option, this is usually the quickest and safest path. The current provider will take care of transferring the funds to the new provider either through a money transfer or check. An indirect transfer requires that the current provider sends the dollars to you, usually via a mailed check made out to the new provider. You are then required to send the check to your new provider. There is inherent risk with this method and generally takes longer to get your dollars reinvested. Not to mention the double transfer of your funds which can get lost in transit. This has happened to me and is a nerve wrecking experience to say the least. You are only allowed to do 1 indirect rollovers per 12 month period. You can do as many direct rollovers as you want in a year.
I am not a certified financial planner or tax adviser. I am happy to share my learnings and experiences. Please do your own research before making financial decisions.
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