LEVATUS Q & A | What Should I Do With My Old 401(k) Accounts

Jessica Grande, LEVATUS Senior Client Advisor, answers questions about tracking down and revving up your old 401(k) plans

Photo by Johan Godinez

---

We have all been there. Day 1 of your new job and you are already bombarded with an avalanche of HR tasks – new health insurance, dental, payroll and retirement - not to mention settling into your new role and learning the ropes of a new organization.  The last thing you want to deal with are the administrative headaches from your previous employer – namely dealing with your old 401(k). You tell yourself that you will take care of it when you have the time to really dig in and figure it out.

The weeks turn to months, which turn to years (or decades) and now you find yourself with a handful of retirement plans. Each of these plans may be with a different custodian, have different investment options and have different fee structures. It has become complicated and confusing to monitor each of the plans and you are unsure of how to proceed. You are not alone. Many people wind up in the same boat but the path back to a more controlled, focused and well designed retirement strategy is within reach. Here are some items to consider when making a plan:

I have a number of 401(k) plans from my former employers, should I be doing something with these?

It is a always a good idea to review your 401(k)/403(b) plan at a former employer, just as you would any other investment. With old plans there are some additional reasons to take the reins and get back in control.

·         Out of sight, out of mind: If you aren’t reminded of it through company emails or HR benefit discussions, old plans can be easy to ignore. Not paying attention could cost you in both fees and performance. Also, not paying attention to changes in the plan could cause time consuming confusion in the future as the plan could change investment options or even custodians so you will have to track down where your plan is, which can be stressful.

·         More, and potentially less expensive, investment options: When your employment with one organization ends, you have the ability to roll your 401(k)/403(b) plan into an IRA (Individual Retirement Account). These types of accounts are held directly in your name at a custodian and not tied to your employment. For the most part, these accounts can hold any investment that a brokerage account can hold (stocks, bonds, mutual funds, ETFs, etc.) , which can give you many more choices than a 401(k)/403(b) which only allows you to invest in a list of mutual funds that are chosen by your (former) employer’s plan.

·         Consolidation can make life simpler and portfolio strategy clearer: Tracking your retirement savings can be easier with fewer custodians, fewer accounts and fewer statements. .Having more plans does not equal diversification, fewer accounts can create more clarity around how your investment choices really fit with your overall strategy.

Some reasons to keep a retirement plan at a former employer would be that some plans are unable to be moved such as unvested company match or defined benefit (pension) plans for people under retirement age. In order to see if you are eligible to move your former employers’ retirement plan, you should reach out to the custodian that holds your plan.

What are the differences between a 401(k) and a Rollover IRA anyways?

A 401(k) plan is a retirement plan that is sponsored by your employer and your contributions are taken directly out of your paycheck. A Rollover IRA is an account that you hold directly at a custodian of your choosing where you deposit the funds that you have transferred (also known as rolling over) from old 401(k) accounts. Both are considered tax-advantaged retirement accounts.

The primary benefits of a Rollover IRA are choice and control. An Rollover IRA provides the owner with more investment choices and control than a 401(k), as the IRA is not linked to your employer.

A few benefits of the 401(k) plan are that they offer the option of an earlier retirement age than the Rollover IRAs (55 versus 59 1/2).  In addition, 401(k) plans sometimes offer investment options that are not available to the general public.

Why can’t I just withdraw the plan and deposit it into my savings account or other brokerage account?

A 401(k) (or 403b for non-profit employees) is a retirement savings and investing plan that many employers offer as a benefit to their employees. Contributions can be made through payroll deduction before salaries are taxed, thereby creating a tax savings. Because of these tax benefits, there are rules and penalties if you do not wait until retirement to use these funds. If you withdraw money from your 401(k) before you're 59½, the IRS usually assesses a 10% penalty when you file your tax return, in addition to the income taxes that you will owe.

I want to move my retirement plan; how do I go about doing so?

The best way to make a move is to check in with both the custodian you are moving from and the custodian you have decided to use for your new account. You want to make sure both are in sync with the process beforehand. Reaching out to the current custodian will help you understand the process a give you a check list for moving the assets. Initials steps at the new custodian generally include filling out a paper form and mailing it, or completing it online. When 401(k) plans transfer, generally speaking, the holdings in the existing account are sold and transferred as cash, so it is important to remember to reinvest the assets when they settle in your new account.

When filling out the paperwork to transfer the 401(k), you may need to indicate whether you would like to do a direct or indirect rollover. It is important to understand the consequences of each:

A direct rollover allows you to transfer the money from a former employer’s 401(k) plan (or non-profit or government agency equivalent) into a different retirement account without having to actually withdraw and deposit it yourself. Your 401(k) administrator simply writes or wires a check to the account you wish to send it to.

In the case of an indirect rollover, your previous retirement plan administrator writes a check in your name and sends it to you, which then makes you responsible for depositing into your new retirement account within 60 days. Serious tax consequences occur if you miss the deadline, so this option may create unnecessary risk. If you miss the 60-day deadline, the 10% early distribution penalty may apply, as well as tax on any gains in the account.

Is there anything else I should keep in mind when rolling my 401(k) plan to an IRA?

It is important to know whether you have a ROTH or Traditional 401(k) plan. With the ROTH you are contributing after tax dollars to your plan and with the traditional plan your are contributing pre-tax. tax free at retirement. Because of this difference in tax treatment, it is important to know what your current plan consists of (some plans allow you to contribute to both simultaneously) so that the rollover account matches.  You can find out what your plan is by either reviewing the statement or calling the custodian and asking. You should always confirm before starting the rollover process as this will save headaches later if you happen to try to move to the wrong type of plan.

Now that I have consolidated my accounts into an IRA, how should I choose my investments?

Choosing your investments is completely up to your individual life situation. Some things to consider include:

·         When do you plan on retiring?

·         What are your priorities?

·         How much risk do you want to take on?

·         Do you want your values to be represented in your investments through ESG investing?

Once you have thought through these questions you will have a better idea of how much to put in equities, fixed income and cash in addition to the types of companies you want reflected in your portfolio. If you are uncertain a financial advisor you think through how your specific situation should be reflected in investment choices.

Tax, estate, investment

Distilling complex topics down to their essence is a hallmark of the LEVATUS approach.

ABOUT THE AUTHOR

Jessica Grande is a senior client advisor at LEVATUS with over 15 years of experience in the financial services industry. Her professional background includes high net worth advisory, investment research and wealth planning. Jessica writes articles with her clients’ needs in mind.  She has a particular focus on aligning client values with long-term strategy and planning items in order to achieve financial control.  As a co-founder of LEVATUS and female financial advisor, Jessica is happy to be able to focus on what really matters to clients, whether it entails discussing how wealth can impact children, creating financial empowerment for retirement, or joining a community of like-minded individuals.

ways to share