As reported on Thursday, continuing jobless claims still stand at over 18 million.  With many people getting laid off due to the COVID-19 pandemic, or simply changing jobs during this time, one thing that often gets overlooked is the 401(k) with your former employer.  What are your options for these plans?  In this post, we will cover three of the most common options employees have when it comes to their former employer’s 401(k) plan.

 

1. Leave it in your current employer’s plan: If your 401(k) balance is over $5,000 when you leave your employer, they cannot “force” you out of their 401(k) plan.  If this threshold is met, you can keep your assets in the plan for as long as you desire.  Before doing so, you should certainly weigh your options.

You may want to keep your retirement nest egg in your former employer’s plan because you like the current investment options or perhaps your old 401(k) has lower expenses than your new plan.  These are some of the most common reasons people choose to leave their assets in their former employer’s 401(k).

Another consideration is the timing of when you need funds from your retirement plans.  Generally, funds held inside a 401(k) or IRA account are not accessible until you are age 59 ½ without a 10% early withdrawal penalty.  However, there is an exception for funds held in a 401(k) plan if you quit, retire, or were fired at age 55 or older.  If you are age 55 or older, then you are granted an exception from the 10% early withdrawal penalty, but only on funds held within your former employer’s 401(k) plan.

An often-overlooked reason to keep your former employer’s 401(k) intact deals with a tax advantage called, Net Unrealized Appreciation (NUA).  If you hold your former employer’s stock in your 401(k), you may be eligible for this added tax benefit.  However, if you roll your 401(k) plan over to an IRA you may lose the opportunity to take advantage of the NUA tax treatment.

 

2. Roll your old employer’s 401(k) into your new employer’s 401(k): If allowed, you may be able to roll your old 401(k) to your new company plan.   To do this, your new employer’s plan must accept rollovers.  Unfortunately, not all plans do.

Before deciding to roll over your old 401(k) to your new one, you should do some due diligence on both plans.  Compare the investment options and expenses of the two plans.  If your old plan has more investment options and lower fees, you may want to leave your old 401(k) alone.  However, fees do not tell the full story.  If having the ability to take out a loan against your 401(k) is an important feature to you, you may consider rolling your old 401(k) into your new plan.  Should you need the funds, this can give you more assets to take a loan against.  One thing to mention is that this assumes your new 401(k) plan allows for loans (some plans do not have this feature).

It has been said, “never overlook the power of simplicity”.  Consolidating your old 401(k)’s to your new 401(k) can help you keep track of your retirement nest egg easier.  One single account is often easier to track and manage than multiple accounts all over the place.  If all else is equal, it may make sense to roll your old 401(k) to your new 401(k) for no other reason than to make life (and your finances) that much simpler.

 

3. Roll your old 401(k) to an IRA: Last but not least, you can always roll your old 401(k) to an IRA.  By doing so, you will usually have access to more robust investment options than in a 401(k) plan.  Having access to more investment options can be very powerful in terms of helping you reach your long-term goals.  However, with great power comes great responsibility.  Before investing your retirement nest egg, you should understand what you are investing in and the potential risks (not just potential returns) you may be facing.

While an IRA may offer you added flexibility within investments, you should research the costs associated with the bank or brokerage firm in which you open your IRA account.  Fees can vary greatly between banks and brokerage firms.  Not only should you consider fees on your underlying investments, but you should also consider transactions costs for buying/selling investments and if the bank or brokerage firm charges any account maintenance fees.

If rolling over your 401(k) to an IRA makes sense for you, one thing to consider is “how” you roll these assets over.  The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 offers protection for contributions to, and earnings in, IRAs up to $1,000,000.  However, the Employee Retirement Income Security Act (ERISA) of 1974 gives unlimited bankruptcy protection to qualified retirement plans, including 401(k)’s.  Over the years, courts have ruled that since proceeds in a Rollover IRA originated from a qualified account, Rollover IRAs are afforded the same unlimited bankruptcy protection as qualified accounts.  One potential pitfall to be mindful of when rolling over your assets from a 401(k) is that rolling them to a traditional IRA may leave you with a maximum of $1,000,000 of bankruptcy protection.

 

With many Americans searching for work and changing jobs, old 401(k) plans often get overlooked.  Besides completely “cashing out” from your old 401(k) (beware of serious tax consequences), you generally have 3 options: leave it in your former employer’s 401(k), roll it to your new employer’s 401(k), or roll it over to an IRA.  Before making a final decision, you should always consider your specific circumstances, features of your new and old 401(k) plans compared to an IRA, costs associated with each plan, and investment options.  The right decision will depend on several factors unique to each person.  If you would like help weighing your options on your old 401(k), please contact us today.

Author: Brett Fry

Brett rejoined Forteris Wealth Management this year and is managing our office in Dallas, TX.  While helping clients plan for retirement, education and generational asset transfers, Brett's expertise in portfolio management, managing concentrated stock positions, planning for the sale of a business, and helping young professionals accumulate wealth enables him to guide clients through their continuously changing financial decisions.