So, you landed the new job, you're excited, going through all the job-related changes, getting up to speed, and more – but what happens to your old 401(k)? It's probably the last thing on your list.
For most people, it stays where it is. Which, in a lot of instances, may be fine – but you'll end up with multiple 401(k) accounts, and managing it all can be taxing. There's another approach that can help you make the best decision based on your tax status, employer situation, and the rest of your financial plan.
The big benefit of a 401(k) is that it is "portable," meaning you own it and can move it. There are three ways to move your plan, and they each have different tax implications.
First option: If you decide to roll the plan over, you may be able to transfer the assets directly to your new employer's plan if they accept transfers. It's called a "direct transfer," and the amount you have invested rolls over intact, with no taxes deducted, if the old plan administrator makes the check payable to the new plan. You can move to your new employer's plan, or you can transfer to an IRA plan you set up. More on that in a minute.
Second, it's possible the plan administrator makes the check payable to you. If a check is made payable to you instead of the new plan, it's called an "indirect rollover," and the old plan will deduct taxes. An important note - you have 60 days to deposit the amount into your new plan. And if you miss the window and don't contribute the funds to your new plan, you'll get hit with penalties. And they are expensive.
The final option is to cash out. When this happens, a least 20% of taxes will be withheld, and you'll get hit with a 10% penalty at tax time if you are under age 59 1/2. Once you've determined your plan of attack from the old plan to the new plan, it's time to think about diversification.
When enrolling in a new plan, take a careful look at the plan choices offered and how they relates to your old 401(k).
You may decide that you can craft a more diversified strategy by keeping both plans where they are and determine a different investment approach in the new plan. But what do you do if you don't want to roll over into a new 401(k)?
You can roll it over into a traditional IRA. The advantage here is that you have a lot more investment options. You may also opt for a Roth IRA conversion. Yes, you'll need to pay taxes on it, but once you pay the taxes and deposit the funds into the Roth, they grow tax-free. This can be a significant advantage for income planning in retirement.
Thinking through your 401(k)-rollover strategy should be part of the financial housekeeping you do when you join a new company. It also ensures you stay organized. It's complicated, but don't feel like you have to go it alone. I am here to help.
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