You’ve left your job and started a new one or you have finally decided to start your own business. What do you do with the old 401k from your previous employer? 401(k)s and IRAs have many unique features that may be beneficial to you, depending on your circumstances. The decision to roll funds out of a former employer’s plan involves more factors than just fees and investment selection. Let’s look at these decisions and the differences between an IRA and 401(k) int his week’s Inside Look at Building Towards Wealth.
To help make this analysis easier, we have created a “Should I Roll Over My Dormant 401(k)?” flowchart. It addresses some of the most common issues that should be considered before doing a rollover.
This article only pertains to what you should do with a dormant 401(k). You can participate in a new 401(k) while maintaining the dormant plan. You could also rollover your dormant 401(k) to an IRA and still participate in am active 401(k).
The initial deciding factor in what to do with your dormant 401(k) is to ask yourself, after reviewing your summary plan description and investment options, are you satisfied that your plan is well-managed and meeting your needs?
In particular, you should review the fees and investment options listed in the summary plan description and compare those of the dormant 401(k) and your active 401(k) and/or your IRA options.
If so, you should consider keeping your account where it is. If you’re not satisfied, consider rolling the dormant 401(k) into an active 401(k) or IRA.
You also may not want to leave your retirement money behind in an old 401(k). It’s easy to lose track of old plans, and companies can merge or even go out of business. Then it can become a real hassle to find your money and get it out.
If you want the option to contribute to this account in the future, you can only contribute to an active 401(k) account. You should consider rolling the dormant 401(k) into an active 401(k) or IRA.
You will also want to pay attention if you have a 401(k) loan. If rolled over to a new 401(k), the balance of the loan should be repaid by the due date of your tax return for the year you left your employer (including extensions). In addition, IRA’s do not have a loan provision so you would either need to repay the loan or pay the taxes and penalties if you roll to an IRA.
If your account holds company stock. There may be special tax benefits utilizing Net Unrealized Appreciation options. Consider rolling the company stock into a taxable brokerage account to minimize taxes. You will pay income tax on the basis of the shares (and a 10% penalty if under 59.5).
If you are younger than 59.5 and want income you should consider that if you rollover to an IRA, income taken from an IRA is taxable as ordinary income and may be subject to a 10% penalty
If you are over the age of 59.5 and want income, distributions from a 401(k) or IRA are taxable as ordinary income but there is no 10% penalty.
If you left your employer at the age of 55 or older (50 if in public service), consider leaving the assets at the 401(k) as you may qualify for a “separation from service” distribution
If you will be, or soon will be, subject to an RMD due to reaching your RMD age (72 if you were born on or after 7/1/49, 70.5 if you were born before 7/1/49 you could simplify the process by consolidating 401(k)s and IRAs.
I hope the breakdown of this flow chart helps make your decision easier as it takes careful analysis to determine the best course of action. Feel free to contact me directly with any questions.