What to Know About a 401(k) Rollover
When changing employers, it is important to consider what to do with your 401(k). Although the process itself is simple, it is important to know special tax considerations and any potential penalties and fees. Are you aware of your options and what the most effective strategy is for your personal situation? Here are three main considerations:
- What options do I have for my old 401(k) now that am I leaving my place of employment?
- What is the cost associated with my 401(k) relative to the cost that I'll be paying for investments on the outside?
- Are there any special tax considerations to consider when choosing which option is best for my situation?
Considering Your Options
There is not one standard route to follow when choosing what to do with your 401(k). If you are starting at a new place of employment, you may have the option to roll your 401(k) over into your new company’s retirement plan. Other options include withdrawing your funds or keeping the balance with the old company plan – although these are not highly recommended.
You also can roll the funds into an IRA, typically increasing your investment options A 401(k) investment menu option is typically going to be generic enough to build a good asset allocation model, but certainly will not allow you to participate in individual stock issues for better or worse. So if you're somebody who's looking to buy individual stocks and participate directly in those companies' appreciation versus somebody who's looking for more of a generic balanced model, that would be one consideration. Recognize outside of the 401(k), you're going to have more investment flexibility. That enables you to own individual stocks, exchange-traded funds, mutual funds, gives you a universe of investments in the tens of thousands, as opposed to the 15 or 20 options that are in your 401(k).
We recommend discussing these options with a financial planner to discover the best option for you.
Discuss with a Financial Planner
Associated Costs and Fees
You want to examine the fees that they're charging you in your 401(k) versus the fees for the investment platform accessible on the outset. In many cases, you can find cheaper options outside of the 401(k). There are a myriad of different sites that advertise zero-cost trading, giving you access to individual stocks and ETFs. Your 401(k), by the governing plan document, should authorize a prospectus which will outline the internal costs of the funds in the plan. You need to be mindful of what your internal expense ratios are in either circumstance.
Tax Considerations
A lot of people don't understand that they're building up post-tax resources inside of their 401(k). By building up post-tax resources inside of their 401(k), what has happened is they have exceeded the IRS' maximum level of personal contribution and therefore their funds are going into a separate bucket once they have maximized. That would be the equivalent to $19,500 for an individual or $26,000 for somebody over age 50. Once they get the money going in the post-tax component of the 401(k), the earnings on that money is getting added into the pre-tax component. Example would be if I put $10,000 into the post-tax component of my 401(k) and I earn 10% on it or $1,000, that extra 1,000 is going to the pre-tax side when I eventually take it out. Your post-tax funds in your 401(k) can be directly converted to a Roth IRA and therefore provide tax free growth of earnings in the future. This is a tremendous opportunity for people who have invested into the post-tax component and an amazing planning opportunity if you haven't but you do have access to the post-tax 401(k). This is a concept that we call mega-Roth, the idea of funding up the IRS maximum into a 401(k) and then doing a post-tax conversion either in plan or via in-service distribution to a Roth. This enables you to get the maximum pre-tax deduction of 19,500 or 26,000, as well as in many cases, get an equivalent amount into a Roth. A tremendous savings strategy for those who have the cash flow to do so.
What is your strategy?
There is no one, simple answer for what to do with your 401(k). Consider your options and get in touch with a financial advisor for assistance with developing a strategy that is best for your personal situation.
Schedule a Call with a Financial Planner
Representatives do not provide tax and/or legal advice. Any discussion of taxes is for general informational purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax or accounting advice. Clients should confer with their qualified legal, tax and accounting advisors as appropriate.
Ben Soccodato is a registered representative of and offer securities, investment advisory and financial planning services through MML Investors Services, LLC. Member SIPC. www.SIPC.org 6 Corporate Drive, Shelton, CT 06484, Tel: 203-513-6000. CRN202303-280728