Guidance

RESOURCES TO HELP SHAPE YOUR FINANCIAL FUTURE

If you are like most people, you will switch jobs at least a few times over the course of your career. Among the many decisions that need to be made during these times is what to do with your old 401(k).

In many cases–assuming your balance is over $5,000–it makes the most sense to roll your money over into an IRA or into your new 401(k) plan, if that is allowed (leaving the money behind or rolling it into your current employer’s 401(k) may or may not be allowable–the specific bylaws vary by plan, so check on that first). However, there are cases where it is better to leave your old 401(k) in place. Here are some considerations to help you weigh the pros and cons of both options.

Roll It Over
Reason #1: You can do better on costs
Often, 401(k) plans charge administrative fees, and many times the participants themselves bear these costs. Other times, plans use high-cost share classes of mutual funds that have extra fees embedded inside of them. If your new plan has reasonable expenses, low-cost options, and a robust investment lineup, you might want to consider rolling your assets into your new 401(k), if that is allowed by the plan provider.

Alternatively, you could roll your 401(k) balance into an IRA. Unlike 401(k)s, you will not be saddled with administrative costs with an IRA. Additionally, IRAs offer so-called “open architecture,” meaning you can buy almost anything–namely, low-cost funds and ETFs.

Reason #2: Streamline and simplify
This point may seem obvious, but it should not be understated: Having fewer accounts can help you streamline your monitoring and rebalancing efforts. It also allows you to better assess your overall asset mix. Furthermore, consolidating your retirement accounts will ultimately facilitate the process of taking distributions, which become required after age 70 ½.

If you do decide to roll over your 401(k), be sure to have your former 401(k) provider make the check payable to the new IRA or 401(k) provider and send it directly to them, rather than to you. If the check is made out to you, 20% of the balance will be withheld for income tax. You will then have 60 days to get that money deposited into an IRA or another 401(k); if that deadline comes and goes, the distribution will count as a withdrawal and you will owe ordinary income tax and a 10% early withdrawal penalty if you are not 55 or older.

Leave It Behind
Reason #1: Better investments and fees
The flip side of the scenario discussed earlier may be true: Your former employer’s plan has lower fees, or access to cheaper institutional share classes of funds than your new plan. Or your old plan may feature a better investment lineup.

In addition, if you prefer to invest in stable-value funds, keep in mind that these are only available within defined-contribution plans (not in IRAs).

Reason #2: Company stock in your 401(k)
Another consideration comes into play if you have company stock in your 401(k). The tax code allows special treatment of company stock under “net unrealized appreciation” rules that can potentially save you a lot of money in taxes if you have highly appreciated securities and are in a high tax bracket. Essentially, as opposed to paying ordinary income tax on the market value of the shares at the time of sale, the rule allows you to pay capital-gains tax on any appreciation over your cost basis when you sell the shares. If this situation applies to you, check with a tax or financial advisor to help determine the best course of action.

Reason #3: Access to your money
IRA investors and most 401(k) investors must wait until age 59 ½ to be able to access funds in their accounts if they want to avoid the 10% early withdrawal penalty. However, there is an exception to this rule for employees who quit, retire, or were fired the year they turn 55 or after. If you find yourself in this specific circumstance, leaving your 401(k) plan with the company you are departing could make more sense than rolling it over into an IRA and tying it up for an additional 4 ½ years. (Check with your plan first to make sure this would be allowed.)

Meet with your Wintrust Wealth Management Financial Advisor to discuss the best course of action for you and your old 401(k).