More likely than not, you’ve changed jobs at least a couple times in your career. When you change companies, it isn’t unusual to leave behind or forget your retirement account (401(k), 403(b), 457, TSP).
Often, these old accounts are neglected or rarely revisited for many years. But tending to them is important. Your original investment allocation may no longer be appropriate or coordinated with your financial plan. Plus, this is your hard earned savings we are talking about.
Delay no longer! Here are some tips and questions to ask and give your 401(k) the attention it deserves.
ATTENTION: If you are age 54 to 58 years old and thinking about retiring or leaving your current employer, you need to stop reading this article and learn about the Rule of 55. You can also watch the video on my YouTube channel by clicking this link.
Does your new employer accept 401(k) rollovers or direct transfers into their Plan? Ask for the Summary Plan Description (SPD) to find this answer and to find out whether your new employer matches your contributions or offers features such as Roth 401(k) contributions.
Does your new employer’s plan have lower fees and/or better investment options? If not, you may want to consider rolling over your old 401(k) to an Individual Retirement Account (IRA) with lower fees and more investment options.
Roth 401(k) account?
Do you have Roth 401(k) monies in your old 401(k) account(s)? There is additional complexity surrounding the Roth 401(k), including the five-year rule. The five-year rule means that for distributions from a Roth account to be ‘qualified’ and eligible for tax-free distributions of the earnings, five years must have passed since the account was established.
You may have had your Roth 401(k) account for at least five years. But if you’ve never opened a Roth IRA, your five-year clock starts all over again. This is an important consideration, especially if you are fewer than five years from retiring.
Do you have greater creditor protection for your assets in a qualified 401(k) Plan compared to an IRA? Well, if you leave your money within an employer-sponsored qualified 401(k) plan, it retains unlimited protection from creditors and bankruptcy proceedings. 401(k) accounts that are rolled over to an IRA receive unlimited Federal protection (as long as they are not mixed with other traditional IRAs).
Each state has laws that govern IRA protection to varying degrees so it’s a good idea to explore your state-specific laws before making a move if creditor protection is important to you.
Do you have employer stock in your 401(k) Plan? If yes, then you may have the opportunity to use a tax-advantaged strategy called net unrealized appreciation (NUA). Briefly, the larger the gap between your ordinary income tax rate and capital gains tax rate, the larger the potential tax savings when using NUA. If you earn more than $250,000 of household income, then NUA is something you will want to consider.
If you rollover the 401(k) to an IRA, you will lose the opportunity to benefit from NUA – so check before making a move to see if this applies to you.
What about you?
If you have old 401(k)s from prior employers that you know need attention, it’s time to take some action. You have worked too hard to let these accounts run on auto-pilot and not pay attention to what is happening with them. I’d love to be your thinking partner and help you figure it out.
– Kaleb Paddock, CFP®