If you’re like a lot of other folks, then you probably have one or more 401(k) accounts from old jobs that have been cruising on auto-pilot for a few years. Having multiple retirement accounts makes it more difficult to track what you own, what you’re paying in fees and expenses, and how your investments align with your goals and objectives. But it’s a new year, and you’re feeling inspired to get your financial house in order in 2016. So now you need to figure out what to do with these old accounts.
Here are your options:
- Do nothing.
- Rollover to an IRA
- Transfer to your current 401(k) Plan.
- Cash out and take a distribution.
A lot of companies are encouraging former employees to keep their old 401(k) accounts open in an effort to keep more assets in their plan. Baby boomers will continue to leave the workforce in large numbers, which means that 401(k) plans will be losing billions of dollars in the form of distributions and transfers in the next few years. With all of that money flowing out, companies are losing their ability to negotiate lower fees and/or investment choices from their providers. What does this mean for you, the investor? Potentially higher fees and limited investment options.
Rollover to an IRA
Transferring your balance to an IRA gives you more investment options than doing nothing. And you’ll likely pay lower fees by choosing individual stocks or ETFs rather than being constrained by the 401(k) plan’s limited mutual fund selections. If you have the time and knowledge, you can always save more by managing your account in a self-directed online account. But if you’d rather entrust a professional to assist you, then make sure to find a fee-only advisor who can explain all of the fees you’ll pay. At Blue Keel, I charge an overall management fee based on the size of the account and typically select a portfolio of low-cost ETFs to keep the total fees reasonable.
Transfer to your current employer’s plan
If you have the option, you can rollover your old 401(k) account into your current employer’s 401(k) plan. Again, this may limit your investment choices to what your current employer’s plan offers. If you choose to go this route, make sure you understand the fees you’ll pay to the provider as well as what you’re paying for each of the mutual funds you select. Those mutual fund expenses can be hard to find – you’re not going to see them on an account statement.
While this is technically an option, it should only be considered as a last resort. If you cash out your old 401(k) balance, you’ll be hit with a 10% penalty (unless you’re age 55 or older) and pay income tax on the total distribution. Ouch! That could be a lot of cheddar. For example, for a 35 year old in the 25% tax bracket, cashing out a $20,000 account balance will only net $13,000 after taxes and penalties. And something important to keep in mind: you have 60 days to change your mind and deposit the total amount into another retirement account to avoid taxes and penalties. But it has to be the total amount (the $20,000 from the previous example, not the $13,000).
If you have any questions about your retirement plans (401(k), 403(b), 457, IRA or Roths), don’t hesitate to reach out. You can schedule an appointment here, or email me directly at [email protected].