You’ve moved on from your job. One thing you’ve left behind is your 401(k).While you can leave your account in place until the age of minimum distributions*, is that the best decision?There are a number of things to take into account, like whether you are nearing retirement, starting your own business or starting a new job with a new 401(k) plan.Also, consider the investment options available, resources that can help you make wiser decisions about your finances in the future and access to information that better helps you achieve your retirement goals.Here are the available alternatives to consider.
If you chose to leave your 401(k) where it is, your contributions will cease — as will any match your employer made — but your investments will stand which may be a good or bad thing depending on how the account is allocated and whether financial markets are stable or volatile. Also, consider how close to age of minimum distribution you may be. Many 401(k)’s require you to roll your funds to an IRA when you reach the age of 72.
If you start a new job and the employer offers a 401(k), look at the investment options and the resources available in the new plan as you may want to roll your old 401(k) into your new one.Having everything in one account, instead of having multiple 401(k) plans from different jobs, may help keep your retirement savings streamlined.To start the process, speak to your new human resources department to make sure your new plan accepts rollovers. Then, you’ll have to fill out paperwork form your new plan, as well as a transfer form from your old employer.
If there could be a gap of time between jobs or if you are nearing the “retirement red zone” with retirement 5 or less years away consider rolling your 401(k) into an IRA. This also helps keep your retirement savings streamlined — you can consolidate all of your old 401(k) balances into one IRA.An IRA generally also gives you more investment options than a 401(k).You can self-manage an IRA through a self-service brokerage firm where you pick and choose the investment options. You may also prefer to use a financial professional to help you set up the right investments, manage taxes and monitor the day-to-day inner workings of a diversified portfolio. Once you open a new IRA, you can request distribution paperwork from your previous employer. You’ll need the new IRA account number for these forms. Your old plan may directly send the check to the new provider. However, sometimes the check is sent directly to you, with the name of the brokerage firm and then FBO (for the benefit of) your name.Be sure to deposit it into your new account within 60 days, because if not it will be considered a withdrawal — and you could be taxed and penalized.
Taking the Cash Distribution may be a costly decision. Avoiding cash distributions can save you in taxes and penalties. That is because any amount that you fail to roll over will be treated as a taxable distribution. As a result, it would then be subject to a 10% penalty if you are under age 59½. Since the taxable portion will be added to any other taxable income you have during the year, you could move into a higher tax bracket. Cash distributions should only be considered in extreme cases of financial hardship, such as facing foreclosure, eviction, or repossession. If you have to go this route, only take-out funds needed to cover the hardship plus applicable taxes and penalties.