Your 401k… What Now?

By Eric Greenhow

This recent downturn in the US and global economies, as well as the stock market, over the last year or so has undoubtedly affected almost everyone’s 401k and investment situation to some degree, whether large or small.  While few have made it through this challenging time relatively unscathed, you have more than likely heard numerous stories from friends, family members, or colleagues whose current financial and investment situation is dramatically different today than it was even a year ago.

A situation many are now facing is the steadily increasing number of job layoffs seen in recent months, and many forecast that number may continue to rise for the foreseeable future.  So, while many may try to turn this unfortunate event of losing their job into a positive event in their life by embarking on a new career path, or by starting that new company they’ve always wanted to start—“turning lemons into lemonade” as the saying goes—for so many others losing a job can take a dramatic toll on their financial picture.  Specifically, as it relates to 401(k)’s and retirement planning, if you personally have been one who has moved on from a prior job and have left an old 401(k) at your previous employer, NOW is the time to review your options and develop a “recovery strategy” that will guide you as the economy rebounds.

In most instances, you will generally have four options when dealing with an old 401(k) account.  The first option requires you to do nothing.  You can simply leave the assets in the existing plan if the plan allows funds to remain after separation from service and it offers strong performing investments.  The second option would require you to roll them over into an IRA.  The third option is taking a cash distribution, and the fourth would involve moving the assets to your new employer’s plan.

Leaving Assets In Your Former Employer’s Plan.  Before you decide to leave assets in your former employer’s retirement plan, keep in mind that you will continue to be limited by the plan’s investment alternatives, which may not provide the flexibility you need to execute an effective retirement savings strategy.  If your investments in the plan are not allocated properly to reflect your risk tolerance, goals and time horizon, your savings might suffer from too much volatility or provide returns that are inconsistent with your retirement income needs.  Keep in mind that even if funds are left in the plan after you leave service, the IRS will require minimum distributions to begin at age 70 ½.

Rolling Assets Into An IRA.  If you are changing jobs or retiring, the best decision is usually to roll the assets over into an IRA.  Doing so lets you retain the funds’ tax-deferred growth potential.  And to make managing your retirement assets more convenient, you can consolidate all of your IRAs in one place, which also makes it easier to analyze your overall asset allocation.  An IRA also offers a number of other benefits, such as possible conversion to a Roth IRA if you are eligible, access to your money when you need it (taxes and IRA penalties may still apply), and if structured properly, penalty-free withdrawals before the age of 59 ½.  In addition, an IRA will usually provide more investment choices than those in the 401(k) plan.

Cashing Out.  This option should be a last resort.  If you cash out each time you change jobs, you’ll systematically erode one of your most valuable sources of retirement income.  You will also owe income taxes on the amount you receive, and if you’re younger than 55 when you separate from service, you typically will owe a 10 percent IRS penalty as well. 

Moving Assets Into A New Employer’s Plan.  Before you decide on this option, make sure your new employer’s plan permits transfers or rollovers from other types of plans before you proceed.  If your new employer does not offer a retirement plan, consider rolling your retirement plan assets into an IRA.

After all your hard work, you want to be sure to pick the option that’s best for you, the one that allows you to make the most of your investments and maximize your 401(k) assets.  Those who take action now to develop and implement a “recovery strategy” will be glad they did so in the not-too-distant future, in my opinion.  If you are uncertain as to which option would suit you best, or if you need assistance in developing a “recovery strategy” of your own, consult a retirement planning expert who can guide you through this process and help you make the most advantageous, well-informed decision.