Was one of your New Year’s resolutions to get your finances in order? Or have you recently accepted a position with a new employer? Either way, you’re probably wondering what to do with old 401k accounts. We asked James McEnerney, Director of Marketing for investment advisory firm The McEnerney Group, for some expert advice. There are essentially four different paths you can take with a 401(k) account that was established by an old employer. In this post, we cover two of those four options; next week, we’ll tackle the remainder in Part II.
First and foremost, McEnerney emphasizes the importance of a careful decision. Of course, no action you take regarding your finances should be poorly considered or impulsive, but when it comes to your retirement savings, choosing the wrong route can cost you – big time. So be sure to research the topic thoroughly, take some time to read up on the options, and consult with your financial advisor to learn if your personal circumstances might point you in a particular direction.
Option 1: Leave Your 401(k) In Place with Your Previous Employer
According to James McEnerney, the first option is a form of benign neglect; you simply leave your 401(k) where it is. Why might this option be beneficial? It’s less work than the other possibilities, to be sure, but you may simply be happy with it. If the fees are relatively low, and/or if you like the investment options it offers (such as access to institutional share class mutual funds and low-cost index funds), then treat it like the proverbial unbroken toaster and don’t bother trying to fix it.
Another potential advantage has to do with a lesser-known provision of the IRS called “separation from service.” It allows you to start taking distributions from your plan, penalty-free, if you leave that company in the same year or any year after you turn 55 (age 50 for police, firefighters, and medics).
In most cases, you’ll need a minimum balance to leave your 401(k) in place – usually $5,000. James McEnerney cautions you to double-check with your former employer.
Bring the 401(k) Assets Along to Your Current Employer
Then again, that option might not be so simple after all. Since you will no longer be making contributions to that fund, the retirement savings from that particular 401(k) could very well languish in obscurity. You could even forget about it, especially if it’s a drop in your financial bucket – but of course, every drop counts. So why not streamline things and transfer into your current employer’s plan?
If the new plan allows borrowing from your assets, the logic of merging the two accounts makes a good deal of sense, explains James McEnerney, as it will provide you a larger base for that loan.
First, find out if the employer offers a defined contribution plan, usually a 401(k) or a 403(b), that accepts rollovers. If you have already decided that you are pleased with the new plan’s investment options, then it’s time to contact your current employer’s HR department. Once they provide you with the instructions to complete a rollover transfer and acquire the necessary details from you, get in touch with the folks at your former company to initiate a direct rollover or a trustee-to-trustee transfer.
Next week, in Part II of James McEnerney’s primer on how to handle 401(k) accounts from previous jobs, we’ll take a look at the other two options: an indirect rollover or taking a cash distribution. Stay tuned!