New Job this Year? Here’s What to do with Your Old 401(k)
Hello Eagle Wealth Community,
The great resignation of 2021 was one of the biggest employment trends our country has seen in years. As employees reassessed lifegoals, sought out remote positions, or even switched industries, unprecedented job vacancies swept the headlines. If you’re one of the millions of Americans who left a job last year, you may be wondering if you tied up all the loose ends.
One of the common threads of a mobile workforce is that many individuals who leave their job are faced with a decision about what to do with their 401(k) account.¹ Individuals have four choices with the 401(k) account they accrued at a previous employer.2
Choice 1: Leave It with Your Previous Employer
You may choose to do nothing and leave your account in your previous employer’s 401(k) plan. However, if your account balance is under a certain amount, be aware that your ex-employer may elect to distribute the funds to you.
There may be reasons to keep your 401(k) with your previous employer— such as investments that are low cost or have limited availability outside of the plan. Other reasons are to maintain certain creditor protections that are unique to qualified retirement plans or to retain the ability to borrow from it if the plan allows for such loans to ex-employees.3
The primary downside is that individuals can become disconnected from the old account and pay less attention to the ongoing management of its investments.
Choice 2: Transfer to Your New Employer’s 401(k) Plan
Provided your current employer’s 401(k) accepts the transfer of assets from a pre-existing 401(k), you may want to consider moving these assets to your new plan. The primary benefits to transferring are the convenience of consolidating your assets, retaining their strong creditor protections, and keeping them accessible via the plan’s loan feature.
If the new plan has a competitive investment menu, many individuals prefer to transfer their account and make a full break with their former employer.
Choice 3: Roll Over Assets to a Traditional Individual Retirement Account (IRA)
Another choice is to roll assets over into a new or existing traditional IRA. It’s possible that a traditional IRA may provide some investment choices that may not exist in your new 401(k) plan.4
The drawback to this approach may be less creditor protection and the loss of access to these funds via a 401(k) loan feature.
Remember, don’t feel rushed into making a decision. You have time to consider your choices.
Choice 4: Cash out the account
The last choice is to simply cash out the account. However, if you choose to cash out, you may be required to pay ordinary income tax on the balance plus a 10% early withdrawal penalty if you are under age 59½. In addition, employers may hold onto 20% of your account balance to prepay the taxes you’ll owe.
Think carefully before deciding to cash out a retirement plan. Aside from the costs of the early withdrawal penalty, there’s an additional opportunity cost in taking money out of an account that could potentially grow on a tax-deferred basis. For example, taking $10,000 out of a 401(k) instead of rolling over into an account earning an average of 8% in tax-deferred earnings could leave you $100,000 short after 30 years.5
If you’re considering a career move or still have a lingering employer-sponsored plan, please be sure to reach out to us. We’re here to help guide you through life’s big changes.
Until next week,
Your Eagle Wealth Team
After a late start, our little mountain town has finally been blanketed with snow. The Eagle Wealth team didn’t skip a beat and hit the slopes. We think recharging in the outdoors is one of the best ways to clear our minds and prepare for the work week.
How about you? Have you explored the outdoors this winter?