Leaving Your Job? Take Your 401k With You!

By Ford Stokes, MBA

Investment Adviser Representative

The easiest thing to do is to do nothing at all. Which is why so many people end up leaving their 401k with their old employer when they change jobs. I’m here to tell you that taking your 401k with you is a huge opportunity to potentially improve how your investments work, and put yourself on a better path towards retirement.

First, a couple of super-common questions about moving your 401k.

Do I have to pay tax? No - moving your 401k into an Individual Retirement Account (IRA) maintains the tax deferral benefits and means you don’t have to pay tax because of moving the money. Just as before, you’ll pay tax when you withdraw that money and spend it.

Is there a penalty? - No, moving your 401k is not the same as cashing it out. Cashing it out means you are taking the money and spending it. In which case there is a penalty of 10% from the IRS on top of the regular income tax, and in some states - state income tax if you’re cashing it out before age 59.5. Moving your 401k, or rolling it over, means you’re putting it into an IRA and is not a cause for the 10% penalty.

How much does it cost? - Nothing, there are no fees for opening up an IRA and rolling over your old 401k. The fees come once you choose investments. The investments themselves will have fees that should be considered. The actual act of rolling the account from 401k to IRA doesn’t cost anything. Really.

Now that those are out of the way, let’s get to it.

More Investment Options -

Your 401k was set up by your employer, often using a single custodian, for simplicity (for the employer, mainly) and low cost. Simplicity also mean fewer investment options, usually only a small sampling compared to what’s available out there. You probably remember checking boxes for investment options based on a handful of choices. An IRA opens up the possibilities for what investment options are available, and who you can hire to help you do it. Having more options, and being able to hire the best advisor can lead to better average returns, and if done correctly, getting those better returns with less overall risk.

My advice, find a fiduciary that will work towards your best interests - like me : ) - so that you know that you won’t get pushed into products and investments that pay big commissions that are better for the salesperson than they are for you.

Fewer Rules -

Understanding your 401k can be hard because each company has lot of leeway in how they set up the plan and how the administrator runs it. IRAs are standardized by the IRS. An IRA with one institution will have the same rules as an IRA with any other administrator.

Estate Planning -

On your death there’s a good chance your 401k will pay out in a lump sum to your beneficiaries, meaning a big tax bill all at once. An IRA will have more payout options, and options to inherit the account - reducing how much tax is paid out all at once, or delaying it completely to a later time.

Rollover is FREE

Like I said before, it doesn’t cost anything to open an IRA and roll your account, but make sure you understand that fees you’ll pay for the investments you choose.

Managed vs. Hang In There

Having an IRA means you have access to managed accounts that can help manage risk better than a ‘hang in there’ approach. A hang in there approach is when the investments stay the same no matter what happens in the market. Are you aggressive? That mean’s you’ll likely stay in aggressive and inherently riskier investment when markets start to fall. A managed and active approach will reduce the amount of exposure you have to riskier asset classes when the markets start to head in the wrong direction. Meaning you lose less when markets do worse, and have more of the upside when things are going well.

I could go on for quite a while about this, but these are some of the main points for why you should take your old 401k with you when you change jobs.

Let me know what you think! Feel free to email me at [email protected].