Are you ever struck by the feeling you’ve forgotten something when you’re already out the door on the way to work? Maybe you left the oven on. Perhaps you forgot to lock the front door. Or, like the plot of Home Alone, maybe you forgot your child while scrambling through your morning routine! (Hopefully not the latter.)
In the process of terminating employment, an employee’s 401(k) account is often neglected or forgotten about. However, leaving these accounts unmanaged could be detrimental to the funds accrued in them. What are your options?
1. Roll Funds into Your Current Employer’s 401(k) Plan
If your current employer offers a 401(k) plan and allows for rollovers from previous 401(k) accounts, you may want to roll the funds from an old 401(k) plan into your current employer’s plan, and continue saving for your retirement. If you roll your funds into one account, not only will they boost the savings in your current account, but your retirement savings will be much easier to manage if they are all in one place. You will only have to monitor the fees, notices and investment returns related to one account. It’s important to look at the funds offered, the investment expenses and the investment returns related to each account prior to making a decision. Your investment advisor can be a key partner in helping you decide. Keep in mind, if you leave old accounts where they are your savings may dwindle due to potential fees and lack of future contributions. Paying fees in multiple accounts can be a costly mistake.
A major plus of utilizing this option is the benefits of the 401(k) plan itself. 401(k) plans have much higher contribution limits than IRAs ($18,500 for 401(k) plans vs. $5,500 for an IRA), and your savings will see a significant boost if your employer offers matching funds, or a profit sharing contribution.
2. Roll Funds Into an IRA
If your current employer does not offer a 401(k) plan, or a rollover is not available due to the strict rules 401(k) plans must follow, you may still consolidate your funds into one tax-advantaged retirement account by rolling them into an IRA account. If you’re looking for more flexibility in your fund options, this option may be a favorable one as many 401(k) plans limit their fund options due to strict fiduciary rules.
3. Keep the Funds Where They Are
A few things to keep in mind if you decide to leave your funds in your previous employer’s 401(k) plan. If the balance in a previous account is less than $5,000, your previous employer has the option to force your money out of the plan if they are unable to contact you or you refuse to take affirmative action. If your account balance is less than $1,000, they may exercise the option to cash your account out in the form of a taxable distribution to you. In this case, you may lose a large portion of your account balance to taxes and penalties. If your account balance is less than $5,000 but more than $1,000, your previous employer may exercise this option by rolling your account balance out of the plan into an IRA they choose rather than one that you choose. If your account balance exceeds $5,000, your former employer may not force your funds out of the plan. However, they do have the option to charge fees to your account for maintaining it in their plan.
To keep track of your account and remain in control your investments, we recommend utilizing one of the previous options. However, if you determine with the help of your investment advisor that you prefer the investment options and returns offered in your former employer’s plan, then you should stay in contact with your former employer. Make sure you update them when your address, phone number or email address changes. In addition, log into your investment account regularly to review your investment choices and returns. Finally, keep your contact information with your investment provider up to date either online or by phone.
4. The Final, DO NOT USE Option
Don’t rob yourself. Taking a distribution (or “cashing out) from your 401(k) account is a taxable event, meaning you may pay taxes and penalties on the amount distributed to you. Leave this option in the basement with that terrifying furnace of Kevin McCallister’s (we’re back on Home Alone) nightmares.
If you’re unsure of which option is best suited to you, call your financial advisor. Keep the funds you’ve saved for your retirement working for you, and don’t leave them alone to fend for themselves!