Calhoun County, AL – Many employers no longer have a pension plan in place for their employees and instead offer a 401(k) plan. Employees of churches, schools, hospitals, and other non-profit organizations may utilize a 403(b) plan. Once you retire or switch jobs, you are typically no longer eligible to contribute to these plans. Many question what they should do once this occurs and they are longer active in the plan. This article will briefly review what your options are. For the purposes of this article, the options below are for pre-tax 401(k) savings, not a Roth 401(k) plan.
Option 1: Do Nothing; Leave It In the Plan
There is typically not a requirement to move your funds out of the plan (there are certain exceptions). You may like the investment options offered in the plan and may not have a fee to leave your money in the plan. Leaving the money in the plan would not be a taxable event.
Option 2: Cash It Out
Cashing out your plan is typically not in your best interest. Not only does it deplete some or all your retirement savings, but it can also cause adverse tax consequences. The entire 401(k) distribution would be taxable at your ordinary tax rate. Also, unless for a specific exception, money taken out of a 401(k) plan prior to age 59.5 would incur a 10% tax penalty.
Option 3: Roll It Over to Your New Plan
If you changed jobs and now have a new workplace retirement plan, such as a 401(k) or 403(b), you may have the option to rollover the funds from your old plan into the new one. Each plan is different, so it’s important to check into the details and see if your new plan allows for this. If you do perform this type of rollover, and every dollar is rolled into the new plan, there would be no tax consequences. A benefit to consider is keeping it all together to have a larger sum of money working for you.
Option 4: Roll It Over to a Traditional IRA
In my experience, this option is quite common. Rolling over money out of a pre-tax 401(k) and into a Traditional IRA is not a taxable event. There are pros and cons to this type of rollover. One con is that this rollover transaction could potentially cause termination fees. One pro is that IRAs offer significantly more investment options in comparison to most 401(k)s, which can be limited. Also, having a Traditional IRA means that a financial advisor/investment professional may be to directly manage the money for you in accordance with your risk tolerance and investment objectives. However, using a financial advisor could mean higher costs in comparison to the other options mentioned above.
I hope you found this article insightful. If you find yourself in a situation where you have an old 401(k) plan, a financial advisor that acts as a fiduciary (puts your interests above their own), such as a CFP® Professional, should be able to help you review your options and make a decision. Be sure to consider all of your available options and the applicable fees and features of each option before moving your retirement assets. Feel free to reach out to me directly if you have any questions.
Editor’s Note – Jonathan T. Jones® is a local financial advisor who will be a contributing author for the Calhoun Journal. He will be writing financial pieces to help readers understand the market and many changes that are currently happening in the financial world.
Jonathan T. Jones, CFP®
Wealth Manager/Financial Advisor, RJFS
501 Quintard Avenue, Suite 17
Anniston, AL 36201
256-237-2300
Any opinions are those of Jonathan Jones, CFP® and not necessarily those of Raymond James.
Securities offered through Raymond James Financial Services Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. Wealth and Retirement Services is not a registered broker/dealer and is independent of Raymond James Financial Services.
