You have options available to you, but which one is the smartest?
We are in a unique period of time. Prior to the outbreak of the coronavirus the stock market was at an all-time high and unemployment was at an all-time low. In a matter of weeks, we have seen the rollercoaster ride of the equity and bond markets, but more importantly, we've seen unemployment claims skyrocket.
Unfortunately, as we navigate our "new normal" it will take time to fully understand the long-term effect of these early unemployment numbers. If you or someone you know was unexpectedly let go during this time it's important to understand the options you have available to you with your 401(k) account.
Typically, there are four options to consider when you leave a job (intentionally or unintentionally). You can:
Roll the assets into an IRA or Roth IRA
Keep your 401(k) with your former employer
Cash-out your 401(k)
Consolidate your 401(k) into your new employer's plan
Let's tale a look at these options and see which may be the best fit for you or your loved one.
Rolling Over Your 401(k) Assets
With your own IRA, you have the most control and choices for your investments. Most corporate 401(k) plans are limited to 25 or fewer investment options and many of those options have hidden fees associated with the plan.
If you rollover your account to an IRA you will have virtually any type of asset: stocks, bonds, CDs, mutual funds, ETFs, REITs, and annuities. You also have much more control over the fees you are paying when you control the account.
It's important to understand you have two options when you rollover an account, you can keep it in the same tax structure, which would be a traditional IRA or if it makes sense, you have the option to pay taxes on the principal of the account and convert it to a Roth IRA which will shelter your investments in this account from any future taxation.
Keeping the Current 401(k) Plan
If your account's value is greater than a certain threshold, you're allowed to leave your money invested in your former employer's plan. And, if you're happy with your 401(k)'s performance, investment options, and the fees, there's nothing wrong with doing this.
I'd suggest at least comparing the fees charged by your plan's fund options with some alternatives. It's also worth mentioning that there are some advantages to a 401(k) over an IRA, such as the ability to borrow money from your account (if that's offered) and the ability to get penalty-free withdrawals after age 55 if you're no longer working, as opposed to waiting until 59-1/2 with an IRA.
Cashing Out Your 401(k) Plan
This is rarely, if ever, a good idea. Unless you're suffering extreme financial hardship and have no other options, it's not a good idea to withdraw your retirement savings. For one thing, you'll have to pay taxes and penalties*, which depending on your tax bracket can easily take 35% or more of your money. And, you'll effectively be robbing your future self. Just as an example, if you're 35 years old and have $100,000 in your 401(k), cashing it out would give you $65,000 assuming you're in the 25% tax bracket (including the 10% penalty).
* - The CARES Act from Congress has temporarily eliminated the 10% early-withdrawal hit.
Rolling Over to a New Employer 401(k)
If your new employer offers a 401(k), chances are good that you can move your old 401(k) into your new plan. Doing so can make sense if you value the convenience of keeping all your retirement savings in the same place. However, before doing so, compare the fees charged by your new employer's plan and review the investment options to make sure they meet your needs. Once the funds are moved to the new plan they are locked up, so make sure you're making an informed decision before making the change.
The Bottom Line
In all but a few instances, it is better to rollover your 401(k) after leaving an employer. Here are the primary considerations when you're deciding if a rollover is right for you:
Fees
The range and quality of investments in your 401(k) compared with an IRA
Be sure to talk with your financial advisor to decide what is appropriate for you and your situation. If you don't currently have an advisor or would like a second opinion, please feel free to reach out to our team of professionals for fiduciary guidance you can trust.