New Job this Year? Here’s What to do with Your Old 401(k)

Eagle Wealth Management |

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?

The Week on Wall Street

A jump in yields sparked by a more aggressive sounding Federal Reserve sent the market lower to start the new year.

The Dow Jones Industrial Average fell 0.29%, while the Standard & Poor’s 500 declined 1.87%. The Nasdaq Composite index was hardest hit, dropping 4.53% for the week. The MSCI EAFE index, which tracks developed overseas stock markets, slipped 0.55%.1,2,3

 
The Tech Wreck

The perception of a more hawkish Fed put a hard stop to the year’s positive start and pushed bond yields higher and stocks into a broad retreat.

Technology and other high-valuation shares were particularly hard hit by rising yields. Even the larger-capitalization technology companies with strong cash flows and profits were damaged. As yields trend higher, investors are questioning if these companies can lead the market in 2022. Fueling this decline was a four-day sell-off of technology companies by hedge funds that, in dollar terms, represented the highest level in more than ten years. Stocks continued to struggle into the final trading day, unsettled by a renewed climb in yields and an ambiguous employment report.4

 
The Fed’s Surprise

Minutes of December’s Federal Open Market Committee (FOMC) meeting were released last week and it revealed a more hawkish Fed than investors had been expecting. One surprise was that the first hike in interest rates could occur as early as March. Another, and perhaps more consequential, surprise was the idea of beginning a “balance sheet run-off” by the Fed following the first hike in the federal funds rate.5

A balance sheet run-off means that maturing bonds won’t be replaced with new bonds, the result of which is a smaller Fed balance sheet. Many investors view this step as removing liquidity from the system, a departure from market expectations that the balance sheet would remain flat during the Fed’s pivot to monetary normalization.

THE WEEK AHEAD

Key Economic Data

Wednesday:  Consumer Price Index (CPI).
Thursday: Jobless Claims. Producer Price Index (PPI).
Friday: Retail Sales. Industrial Production. University of Michigan Consumer Sentiment Survey.

Source: Econoday, January 7, 2022
The Econoday economic calendar lists upcoming U.S. economic data releases (including key economic indicators), Federal Reserve policy meetings, and speaking engagements of Federal Reserve officials. The content is developed from sources believed to be providing accurate information. The forecasts or forward-looking statements are based on assumptions and may not materialize. The forecasts also are subject to revision.

Companies Reporting Earnings


Wednesday:  Infosys Limited (INFY).
Thursday:  Delta Airlines, Inc. (DAL), Taiwan Semiconductor Manufacturing Company, Ltd. (TSM).
Friday:  JPMorgan Chase & Co. (JPM), Citigroup, Inc. (C), Wells Fargo & Co. (WFC), BlackRock, Inc. (BLK).

Source: Zacks, January 7, 2022
Companies mentioned are for informational purposes only. It should not be considered a solicitation for the purchase or sale of the securities. Investing involves risks, and investment decisions should be based on your own goals, time horizon, and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost. Companies may reschedule when they report earnings without notice.