You landed that plum position in the company you’ve been trying for years to get into. While all is new, there’s still something from your previous employer, your 401(k). You’ve moved on, should you pack up your 401(k) or leave it right where it is?
It’s a big decision. And, much like all financial decisions, it’s not simple because each situation is unique.
But there are some key considerations that can help you make up your mind.
Don’t fix what’s not broke
"If you like the investment options in your 401k, there’s nothing wrong with leaving the funds in the account," says Paul Jacobs, a certified financial planner and chief investment officer with Palisades Hudson Financial Group.
You have low cost basis stock in your 401(k)
"Having low cost basis stock in your 401(k) might just put you in a position to take advantage of one of the biggest tax strategies of your life, if you play your cards right," says Rob Wyrick, Jr., managing partner at MFA Capital Advisors.
Under a rule known as Net Unrealized Appreciation (NUA), employees leaving a company with employer stock in their 401(k) have an opportunity to move the stock out as in kind distribution, allowing the appreciation (NUA) above the cost basis to be taxed at the more favorable capital gains tax rate.
The bottom line, says Wyrick, "Proceed with caution and make sure you have a clear understanding of tax and investment ramifications before initiating a rollover."
When to take the money and run
But there also some good reasons why you might choose to roll over your 401(k) into an IRA. For one thing, in a 401(k) the company has control and can change the administrator at their discretion, which can change your fee structure, as well as the investment options, points out Arland Kelly, managing partner at Kelly Financial Group.
Secondly, with an IRA you likely will have an amazing amount of options to invest, compared to your old 401(k). In an IRA you have the ability to use everything from bank accounts to indexed annuities, mutual funds and more, says Kelly.
Know too, that most 401(k) plans don’t allow your spouse to continue the plan if you die.
If you don’t want to go the IRA route, you can also typically roll over your old 401(k) to your new employer’s plan.
Rolling your money to the new plan would give you the ability to borrow from your plan at some point, assuming you needed to do so. "Not that I would recommend that, but surely that is something to consider that is not available in an IRA," says Michael Goodman, a CPA financial planner with Wealthstream Advisors.
Don’t mess up a good thing
Moving your 401(k) can be full of opportunities to make mistakes. Here’s what you don’t want to do.
Have you borrowed? "Make sure you have no outstanding loans prior to pulling the trigger. Pay off any outstanding loans before rolling over the funds, otherwise the value of the outstanding loan will be considered a taxable distribution. You will pay tax at whatever tax bracket you fall into. To add insult to injury, if you are under age 59 ½, you are also subject to a 10% early withdrawal penalty on the same amount," warns Jonathan Gassman, CPA/PFS, CEO and founder of The Gassman Financial Group.
Be conscious of fees. Be clear on all fees associated with the account where you are contemplating putting your money. You don’t want any nasty surprises. Fees eat into your returns.
"If you can decrease your fees by 1% on $100,000 you are saving $1,000 in fees per year. Over 30+ years that can make a huge difference," says Kelly.
Resist the temptation to "cash out", to take the money and not invest it, but spend it instead. "Cashing out is a big boo-boo. People will generally pay penalties and taxes for doing so," says Kalen Holliday, a spokesperson for Covestor."
You’ll do yourself no favor either if your 401(k) funds are sent to you and you don’t reinvest them, and you let them languish. Says Holliday, "You have to place the money in a qualified retirement account by the 60-day deadline, or you’ll have to pay the tax man."