Well, first and foremost, I’m sorry—and I hope having a discussion about your old qualified retirement plan (usually a 401(k), 403(b) or similar, from here on we’ll just say 401(k)) can help put some of your mind at ease about financial issues (or at least one of them!). While an involuntary job loss can bring lots of financial changes, one of the few things we universally recommend is don’t make any more changes immediately after a significant emotional event (others have included death of a spouse, being notified of a divorce, medical diagnosis). That’s right-the company that wants your business wants you to sit back, take a couple breaths, and think through the ramifications of the decision before you make it.
What are the advantages of moving your 401(k) to an IRA?
Let’s address the elephant in the room first: they hurt you, and you want to get your money away from them immediately so that they can’t benefit from it. Ok. I get it—and that does make sense. We do need to make sure any other costs (both actual and intangible) outweigh that feeling. Here are what we think are the 3 advantages to bringing your old 401(k) with you:
Control of the investment decisions
Do you want lower costs? More investment options? Consolidated statements? More security? More risk? More/Easier control? These are all definitely valid reasons to make a change.
Not participating in the old company plan
Would you feel better knowing the company that was having (potentially) financial issues wasn’t making any decisions about your investments? Do you want to remove their ability to see the amount of money you have? Do you want to take away any support from their corporate plan? These are also compelling concerns—I urge you to make sure there are also underlying financial reasons and not just emotional causes. In cases of company stock, this may be an overriding answer.
Ability to access funds
Would it be easier to access funds if necessary using a new investment vehicle? Do you want to keep that access private? This feels like a combination of the more technical or financial reasons as well as the emotional ones. This is a great place to warn you about your new investment choices: if you are going to be accessing funds soon, please strongly consider any upfront sales charges, surrender charges, or lock-up times that would limit your ability to use those monies.
What are the advantages of leaving your 401(k) where it is?
Wait, what? Yes! There can be advantages to leaving it, and to be fair we need to point out a few.
Cost
Often a 401(k) is cheaper than having a privately managed account. Your company and coworkers are all helping to subsidize the overall cost. Because of the size and nature of 401(k)’s, share classes are often more advantageous to the investor (lower cost!).
Ease of use
It’s already set up, you’re already familiar with it, and it doesn’t take any work to leave it there.
Backup
What do I mean by backup? The government is there to back you up! They have laws that regulate the investment selection, application of qualified retirement plans, and assignment of responsibility of many of the parties involved. It’s nice to have the government on your side!
What if I already have a new job, can I take the money there?
Almost always, yes. It is absolutely a question you should ask your new retirement plan representative (Do you accept rollovers from outside retirement plans?). The advantages would be the same as what we had here for keeping the money in your old plan, and the advantages for rolling it out would be the same. The best way to tell where you really fall is to evaluate your new plan carefully, compare it to your old plan, and then to compare them both to any outside options—this is where we would also suggest professional help!
What if I just want the money?
Well if you have to have the money to make ends meet, certainly you can take it out. We recommend against it in all cases that aren’t absolute necessities. You will have a 10% penalty plus the potential for federal, state, and local taxes—that can be a huge bite. This is one area you should consult a tax professional before making any decisions.
No matter how much money it is, and what the market is doing, you earned that money and you are responsible for managing it. Please don’t forget where you left it! If you would like to talk through the pros and cons, please give us a call. We’d be happy to do that for you—free—while you decide what’s next in your career.
This list is not comprehensive. There is a lot more to cover, and individual situations are quite varied.
Please be sure to speak to your financial professional to carefully consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses, and fees.