Did you leave something behind when you left your last job? Perhaps your vested 401(k) balance? According to a study from the U.S. Government Accountability Office (GAO), you’re not alone. The study 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
Technically, there’s nothing wrong with leaving your balance behind. However, it can create some retirement planning complications. For example, if the employer is sold or goes out of business, you could have trouble accessing your funds or managing the money. If you pass away, your beneficiaries could have trouble tracking down your old balance.
If you have a balance in an old 401(k) plan, now may be the right time to take action. Below are a few options. Consider your unique needs and goals. You also may want to consult with a financial professional to help you decide on the right strategy.
Cash it out.
You always have the option of taking your 401(k) balance as a single lump-sum distribution. You simply fill out a form, and then the plan administrator sends you a check. In fact, the plan may automatically distribute your funds if the balance is below a certain threshold.
Many people choose this option because they want to use the funds on pressing financial priorities. However, a lump-sum distribution can lead to dangerous consequences. Distributions from a 401(k) plan are taxable, so you’ll lose much of the distribution to income taxes. Also, you may face a 10 percent early withdrawal penalty if you are under age 59½.
Keep it there.
As mentioned, you don’t have to do anything with the balance. You can simply keep it in the employer’s plan if that’s what you prefer. However, doing so could make it difficult to access your funds, manage your investments or get service on the plan.
Also, it can be difficult to implement a cohesive retirement strategy when you have funds spread across multiple accounts. Many people have multiple 401(k) plans because they open a new one each time they change jobs. That can become unwieldy over time, especially if you change jobs often.
Roll the assets into an IRA.
Finally, you may want to consider an IRA rollover. You simply open an IRA and then direct the 401(k) administrator to transfer the funds to your IRA custodian. You avoid taxes and the early distribution penalty if you transfer the funds via a rollover.
Many people choose to use an IRA as their primary retirement savings vehicle. It offers tax-deferred growth, and many IRAs have a wide range of investment options. That means you can choose the allocation that best aligns with your goals and risk tolerance. You also may have access to tools that can provide guaranteed income or downside protection, such as annuities. Those kinds of options often aren’t available in 401(k) plans.
Ready to take action with your old 401(k) balance? Let’s talk about it. Contact us today at M&P Personal Financial Planning. We can help you analyze your needs and implement a strategy. Let’s connect soon and start the conversation.
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