An offer letter is in the mail. Now what?

At this time of the year, with bonuses from last year pocketed, I am sure a few of you are looking for greener pastures!  What you’re going to do with your 401k plan balance is definitely not one of the top things on your mind when switching jobs.  However, it is an important decision that needs to be made.  The three basic options are as below:

1. Leave money in your old 401k plan

The downside of doing this is that you can no longer contribute to this plan and you will have to manage multiple plans.  Also, if your former employer goes through a merger or acquisition or changes 401k providers, you will have a hard time keeping track. This may be the only option in the short-term though if your new employer offers a 401k plan but requires new employees to work for the company for a specific period of time before letting them participate.

2. Roll over your 401k to new employer’s plan

This is a good option if the investment choices available are good and the fees are not too high (assuming your new employer accepts rollovers).  It also helps to have all your 401k money in one place from a management perspective. A direct rollover will simply transfer your balance from the trustee/custodian of the old retirement plan to that of the new one.  In some cases, the check made payable to the new plan may be mailed to you but the money will not pass through your hands unless you opt for an indirect rollover which is not advisable since that will give you 60 days to redeposit the funds and missing the data would make the distribution taxable.

3. Roll over your 401k to an IRA

If the investment selection at your new employer is not great and/or the associated fees are high, you could move your 401k into an IRA or Roth IRA.  The difference between the two is the timing of taxes. With a tradition IRA, you contribute pre-tax dollars and pay taxes on your contributions and gains when you withdraw the money at retirement (59 ½ years). With a Roth IRA, you contribute after-tax dollars but can withdraw contributions and gains tax-free starting at 59 ½ years of age.  There is an income cap on the Roth IRA – however, there is no limit on how much 401k money you could move to an IRA.

In some cases, you may have to pay a one-time fee for rolling over your 401k balance but that is usually a very nominal closing fee.  Whatever you do, don’t ever withdraw the balance of your 401k balance when switching jobs instead of moving it.  Withdrawals made before the age of 59 ½ incur a 10% early withdrawal penalty and of course reduce your retirement savings.  An exception to the rule is if you lose or leave your job at the age of 55 or later – no penalty in that case.

Until next time!

Sunil Gangwani,

Co-Founder, Plootus

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