Where should I move my 401(k) account from my past employer?
I set up a 401(k) account through Merrill Lynch with my past employer. Do you have any suggestions for places I could move it?
Most employers offer four basic choices to departing or retiring employees:
- Leave the money where it is.
- Withdraw the money in a lump sum. A lump-sum distribution can trigger adverse federal and state income tax consequences and the distribution will be taxed to the employee as current income and the 10 percent early withdrawal penalty may apply.
- Roll the funds over into an IRA.
- Transfer the money to another employer’s retirement plan. If you are still working and want to delay taking required distributions, you can do so beyond age 70½, provided you continue to work for the employer maintaining the plan.
Keep in mind that these options are not mutually exclusive as you may make one choice for part of your plan assets and another choice for the remainder.
It is more common for you to move your retirement plan to either another retirement plan or an IRA. Some of the reasons individuals move their workplace plan assets would include (although if your vested account is less than $5000, the plan may cash out the ex employee's account):
- To consolidate retirement plan assets in an IRA.
- If you want to work with your personal financial professional.
- In order to have a broader choice of investment alternatives.
The most common type of rollover involves transferring funds from a qualified retirement plan to an IRA and typically occurs when an employee leaves a job or retires. When funds are rolled over, the account continues accumulating on a tax-deferred basis because the funds are simply moved from one retirement account to another. If done properly, no taxes or penalties apply. And, there is no dollar limit on the amount that may be rolled over.
Generally, if it is possible to roll it over to your current employer that can be your simplest solution. It also tends to keep your costs down, gives you better compounding on your interest, gives you access for loans, and can make bookkeeping a much simpler task.
If however, that is not an option for you, or you have a substantial amount of assets ($500k+) rolling your 401(k) to an IRA might be a good option because it maintains the tax deferral while giving you greater investment options. Given the limited information provided it would be impossible to give you individual advice on where to purchase that IRA and what investments to put into that IRA. Before you make any move though, you should always consider the tradeoffs to each investment. Some of these are: fees, timeline for needing access, and expected growth of the account.
As a general rule, mutual funds are more liquid but can have moderately high expenses.
Variable annuities almost always have high expenses and often trail the market in returns.
Indexed annuities provide a high degree of safety and generally have no cost. For an added cost they can have a pension-like payment plan for life, but overall indexed annuties will not grow like the market overall.
Indexed funds are low cost and do as well as whatever index they are tied to (Dow Jones Industrial, S&P 500, Nasdaq, etc) but they also go down with the market during bad years so can be more volatile than desired for those close to retirement.
Alternative investments can include real estate, life insurance that people have sold, small business loans, oil and gas wells, and many others, but they can have high hidden fees, can be very risky, and/ or can be very hard to access money or sell to other investors.
For these reasons, it is advisable to research your options before making a decision. A qualified financial advisor can help with these choices- but make sure they are fiduciaries so that you know they are acting in your best interest.
There four options as to what you should do with your 401K from your previous employer.
1. You could transfer it to your new employer.
2. You could roll it to an IRA, if you choose this approach, make sure you pick a fee-only independent advisor. If you work with a broker, at a large brokerage house, you are likely to be sold a financial product. You are not necessarily getting advice in your best interest. Prior to moving the 401k interview a few independent advisors. Find someone that fits you.
3. Take a distribution. I don’t know enough about your situation to advise on this. But generally taking a distribution is not advised.
4. Leave it there. If you have more than $5000 in the plan you can leave it there and the employer will continue to service the account.
You should sit down with an independent advisor to evaluate your options prior to doing anything. Its imperative that you talk with a fiduciary and not a broker, as you want unbiased advice.
Yes, you can roll it over to an IRA without penalty if done properly. An IRA is an individual retirement account that likely offers much more flexibility with fund options. I suggest a free consultation to review allocations based on your goals and time horizon.
Hi, it’s a good thing you are thinking about your 401K with your old employer- most people forget about it.
There are three things you can do to manage it in a tax efficient manner 1) Keep it as it is ie in the old employer's 401K account at Merrill lynch 2) Open a rollover IRA and rollover your assets to this IRA. If this is done appropriately such as in a trustee to trustee transfer, you will not incur any taxes. 3) Move it to your new employer's 401K plan if the plan allows it.
There are a few differences/pros-cons between a 40K plan and an IRA. From an investment point of view usually the cost of mutual funds in a 401K plan are lower because they have access to the Institutional share class; if you don't have access to the Institutional share class in your IRA- it would be more expensive. This is not usually an issue if you plan to invest in ETFs. You have to be careful though, sometimes, 401K plans can have other fees which may not be obvious, but which may result in a higher overall fee.
On the other hand, you have a much broader investment choice in an IRA whereas the choices tend to be limited in a 401K plan.
Some other differences between a 401K and an IRA are:
No RMD (Required minimum distribution) at 70.5 years from 401K if you are still working and are not a 5% owner; better creditor protections in some cases for the 401K. T
Other differences are: Possibility of earlier penalty free withdrawal from 401K between ages 55 and 59.5 years, ability to get loans from 401K (Can't get loans from IRA) and a few different reasons for penalty free withdrawal between the two.
The IRS website has more information about the RMD for IRA versus 401K: https://www.irs.gov/retirement-plans/rmd-comparison-chart-iras-vs-defined-contribution-plans