A study from the U.S. Government Accountability Office (GAO) found that more than 25 million Americans left their 401(k) balance in a former employer’s plan during the 10-year period from 2004 through 2013.1 While there may be nothing wrong with leaving your 401(k) balance at a former employer, it could create planning challenges.
If your old employer is ever sold or goes out of business, you could have difficulty accessing your funds. Even if the company changes 401(k) providers, you may find it difficult to navigate the new system or get support.
The good news is you have options available. Below are three possible approaches. Consider your unique needs and goals before taking action. Also, you may want to consult with a financial professional to help you determine which option is best for you.
Take a distribution.
You always have the option of cashing out your 401(k) balance and taking a lump-sum distribution. In fact, if your balance is below a certain threshold, this could happen automatically at some point. Many plans automatically distribute balances of less than a few thousand dollars if the employee has left the company.
It’s tempting to take a cash distribution. After all, you’d be getting a lump sum that you could use however you like. However, distributions from 401(k) plans are considered taxable income, so you’ll likely pay income taxes on the full amount. Also, if you’re under age 59½, you may have to pay a 10 percent early distribution penalty.
Don’t do anything.
You may prefer to keep your funds in the old employer’s plan. Maybe you like the plan’s online portal or investment option. In most cases, you can keep your funds in a plan even if you’re no longer employed with the company. However, this could be problematic. As mentioned, if the plan changes or the company is sold, you may not have easy access to your account.
It also may be difficult to plan for retirement if you have retirement balances spread across various accounts. Some people have multiple 401(k) plans, one at each employer on their resume. It’s hard to implement a cohesive strategy when you have many different accounts and each account has its own options.
Finally, consider rolling your funds into an individual retirement account (IRA). An IRA rollover isn’t considered a taxable distribution, because an IRA follows similar tax rules as the 401(k). You simply open an IRA and then fill out forms with the 401(k) plan directing the administrator to forward your balance to the IRA custodian. You avoid taxes and an early distribution penalty.
Many IRAs offer a wider range of investment options than 401(k) plans, so you can implement a strategy that’s right for you. You also may have access to planning tools such as annuities, which may not be available in your 401(k).
Ready to take action with your old 401(k) balance? Let’s talk about it. Contact us today at UBC Retirement Income Planning. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation.
Licensed Insurance Professional. This information is designed to provide a general overview with regard to the subject matter covered and is not state specific. The authors, publisher and host are not providing legal, accounting or specific advice for your situation. By providing your information, you give consent to be contacted about the possible sale of an insurance or annuity product. This information has been provided by a Licensed Insurance Professional and does not necessarily represent the views of the presenting insurance professional. The statements and opinions expressed are those of the author and are subject to change at any time. All information is believed to be from reliable sources; however, presenting insurance professional makes no representation as to its completeness or accuracy. This material has been prepared for informational and educational purposes only. It is not intended to provide, and should not be relied upon for, accounting, legal, tax or investment advice. This information has been provided by a Licensed Insurance Professional and is not sponsored or endorsed by the Social Security Administration or any government agency.
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