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What to Do With Your Old 401(k)?

What to Do With Your Old 401(k)?

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.

most 401(k) plans don’t allow your spouse to continue the plan if you die

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.

Pay off any outstanding loans before rolling over the funds

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.

Keep saving

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."

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Anonymous   |     |   Comment #2
Does anyone else see the collusion between politicians, lawyers, accountants, money managers and "financial advisers" who reap huge rewards creating overly complex laws (and resulting regs), the result of which is to skim a rather large percentage of hard-earned money from unsuspecting folks? Fees (many are well hidden) alone are enough to make one cry.  
Anonymous   |     |   Comment #3
Remember when there was no income tax on Soc Sec?  For those that think it is "guaranteed" that there will be no taxes (ever) on 401K increases or IRAs and then that ole stand-by Roth IRAs...better be careful when the gov't needs $s.
hoho   |     |   Comment #5
You pay taxes when you take your money out of an IRA or 401k. It is just tax deferred.
Maecl   |     |   Comment #9
As I understand it, a Roth 401K acts the same as a Roth IRA with taxes.  We just can't assume the government will forever keep it that way
Anonymous   |     |   Comment #4
If you move 401k funds to an IRA then it can be beneficial to keep the funds separate from other IRA funds so it's considered a conduit IRA. This let me move the funds back into a 401k later on (which I did to avoiding paying taxes on a portion of the funds each year I did a "backdoor" Roth IRA contribution).
Anonymous   |     |   Comment #6
This piece mentions rolling of 401k funds into an IRA.  Those contemplating a ROTH IRA need to be aware of this latest Obama administration tax increase, which at this time is a proposal only:


Note that while this WSJ article emphasizes impact on heirs, it also details Obama's plan for immediate taxation of living Roth IRA account owners, by forcing them to begin dissolving their Roth IRA accounts at age 70 1/2.  

I'm not suggesting this proposed new confiscatory taxation, for purpose of wealth re-distribution, will become law any time soon.  But with $18T of current debt, and ginormous future unfunded liabilities, it's certain America will eventually be looking for any money it can find.  Thus, for (relatively) younger people in particular, reliance on today's ROTH IRA benefit promises might be something to re-consider.
me1004   |     |   Comment #7
Yes, I just learned of this. This is truly an abomination. The big reason to get a Roth is to NOT have to start withdrawals at age 70. You take a tax hit up front just to avoid that. And now, as I am nearing that age, I'm to suffer the withdrawls anyway?! That is NOT what I PAID for in advance with my taxes.

With this new rule, I would have been a LOT better off in a traditional IRA. It is just not right to set out rules, run them during the time there is no benefit to me, and then when my benefit time is nearing, change the rules to kick me out! That's like a bank changing the rate on a CD in midterm!

It is OK with me if they stop the inheritance benefits. But they can't be changing the benefits you PAID for with taxes, not during your lifetime.
Anonymous   |     |   Comment #10
Understood and agreed.  Please remember, it is only an Obama proposal at this time.  Think of it as a "trial balloon".  How people vote two months from now, and in 2016, will have much influence on where this proposal goes and how quickly.  Older people might have a chance to escape this wealth re-distribution scheme.  But younger and middle-aged folks are likely to become victims, at least IMHO.
Anonymous   |     |   Comment #11
This is now a proposal from the president and it is a negotiation point for tax reform. This has been in Paul Ryan's budget for a few years. You need to read the newspaper.  Did you know that he wants to raise Medicare premiums on all (married or single)  if income is over $45,000.
Anonymous   |     |   Comment #12
Your post is very well taken and is important.  People need to realize that, today, it is insufficient merely to vote against Democrats.  There are many filthy liberal Republicans out there who are nearly as nasty as the genuine socialist re-distributionist Democrats.  Thank you for highlighting this sad truth.  You have done a public service.
Anonymous   |     |   Comment #8
Given the proposal I see plenty of new work for accountants, financial gurus and IRS investigators. The average 401k balance is under $100K, indicating most have done a lousy job saving and that, as averages dictate, million plus IRS/401K holders will simply make a few calls and buy the advice and services they need. An extremely small percentage of mom/pop IRA/401K holders socked away more than a million after 30 years of work. I know a few non-professionals that did and they are quietly despised (often by friends and family) for doing so. I recommend silence in all things related to personal wealth.      
Anonymous   |     |   Comment #13
Let me paraphase my earlier post...merely b/c something is "tax code favored" now doesn't mean that is a lock for the future and Soc Sec income tax is a classic that Rep AND Dem voted for! Plan accordingly..I still like having a large after tax asset portfolio for flexibility. The tax rates are low on a historic basis!