Financial Planning articles


What to do with  an old 401K?

When dealing with an old 401k account, there are usually 3 options:

  1. Keep it where it is.
  2. Roll it over to your current employer's 401k.
  3. Roll it over to an IRA (Individual Retirement Account).

So what is the best option? Of course, it depends on each situation, but many times I advise clients to rollover their 401k into an IRA*. Let me give you my own real-life example: I worked for Arthur Andersen in Auditing when I first graduated from college, and I vaguely remember being told about a 401k matching program. But I donít recall whether I contributed or not, I was only 22 at the time and not financially savvy back then.

Fast-forward 20 years later, when Arthur Andersen had already sunk like the Titanic, along with Enron. (Iím still in utter shock, I never imagined that could happen to a company that big!) It finally occurred to me that I might have some decades-old retirement money to claim, but it was too late. 401ks are not subject to a companyís creditors, but they can be ďabandonedĒ by a sinking company, making it harder for ex-employees to track down their accounts. I tried for some time and finally gave up my search.

Itís easy to forget about a 401k once you move on, or for loved ones to not know about it if something should happen to you. 401ks also may have limited investment choices, or potentially too much investment in company stock. They can involve high fees due to the administrative costs a company incurs to offer the plan. They can be restrictive and expensive in other ways as well.

On the other hand, there can be benefits to 401ks over an IRA, such as a more liberal loan policy, penalty-free withdrawals at age 55 vs 59.5 for an IRA**, or not having to pay taxes on net unrealized appreciation of company stock. There is also the rare advantage of not having to take RMDs (Required Minimum Distributions) for those over 70.5 who are still working with their employers.

Rolling over a 401k to an IRA may not make sense for everyone, but for many, it can be beneficial.  Contact me if you need guidance on what may be the best alternative for you.

* Note that if a rollover is not done properly, distributions received before age 59.5 can be subject to an early distribution penalty of 10% tax.

** Penalty-free withdrawals are permitted under the 72(t) rule, and for certain exceptions such as the first-time purchase of a home, higher education, and medical expenses.

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