Retirement plan decisions made easy
Lesson 6: Changing Jobs
When you leave your employer before retirement, by voluntarily quitting or through a layoff or firing, you have several options about what to do with your old 401k but most often it includes these four:
- Keep your 401k at your old employer. (But you will not be able to make any further contributions to it.)
- Roll the 401k over into a new 401k at your new employer.
- Take out the cash. If you are not yet 59½ years old, that will cost you in both taxes and penalties.
- Roll the 401k over into an Individual Retirement Account (IRA).
These are the general options, but the first two are dependent upon what the employer allows. As a general rule, taking cash out is a bad idea. The other two choices—leaving your money in the old 401k plan or rolling it over into a new plan—are not bad, but I think you can do better with an IRA.
Do not take cash out of your old 401k. This is the worst possible choice, subjecting you to taxes and penalties—and setting back your retirement security.
Either keeping your old 401k with your previous employer or rolling it over into your new 401k plan is a perfectly acceptable choice. The reason neither one of these is my preferred choice is that you could be paying high mutual fund fees in the 401k plans. You could avoid these extra costs by rolling your old 401k into an IRA.
Drill Down: Should You Keep Your 401k with Your Old Employer?
Should you opt to roll your old 401k plan into a new 401k, make sure that the new one has enough choices to allocate your assets the way that you want to, because if it doesn’t, I can guarantee a good IRA will. Second, check the fees on the mutual funds in the new 401k and if they are running more than one percent of the fund’s assets, an IRA will definitely be better.
Drill Down: Should You Move Your Old 401k to Your New Employer?
An advantage of the rollover to another 401k is that all of your money is together in one place, leaving you with fewer things to keep track of, and that can be a huge benefit if your life is hectic. Its disadvantage would be the mutual fund management fees. The fees tacked onto the mutual funds in your 401k plan are likely higher than the best deals you can find in mutual funds for an IRA. For that reason, I like rolling over into IRA’s better than anything else.
Drill Down: Should You Roll Over Your 401k into an IRA?
If you go for my preference by rolling your old 401k into the IRA, you have lots of options. It can be set up at any one of hundreds of companies that manage funds. Banks can do it, but most people do best by going directly to a company that manages funds. If you simply want to follow the guidelines of this book, pick a good mutual fund family and open your IRA account there. Before picking which mutual fund family, determine if it has the range of funds you need, look at its fees, and make sure they have good customer service.These choices show the advantages of the IRA rollover. You can make sure that you get exactly the types of mutual funds that you want. You can make sure you are selecting a company with great customer service. And you can get the right funds with great service at a very low price. That’s the beauty of the IRA rollover.
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Lesson 1: What the Heck is a 401k, and What’s So Great About It?
Lesson 2: Contributions to Your 401k
Lesson 3: Investments “Cook Book” Approach
Lesson 4: Investments: How Investments Work
Lesson 5: Loans and Hardship Withdrawals from Your 401k
» Lesson 6: Changing Jobs
Lesson 9: Your 401k, Your Other Assets, and Your Life
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