What To Do With The Offer Letter In Mailbox?

At this time of the year, with millions of layoffs due to pandemic restrictions and recession going on, I am sure a few of you are looking for greener pastures! What you will 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:

Colleagues looking offer letter in mail
Image Source: Unsplash

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 before letting them participate.

2. Rollover Your 401k to New Employer’s Plan

This is a suitable 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. Sometimes, 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. Rollover 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 traditional 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.

4. Cashing Out All Prior 401k Contribution

If you’re are not satisfied with the above options go can go with this one. When you leave your previous employer, you can withdraw your 401k funds. Your 401k plan manager will provide you the amaount check at your request. In short term the cashed check may look lucrative but in long term it may not be pleasant, also adding to the pain are penalites and taxes that will charged as per your early withdrwal.

Withdrawals made before the age of 59 ½ incur a 10% early withdrawal penalty and reduce your retirement savings.

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Until next time!

Sunil Gangwani,

Co-Founder, Plootus

We Make Your Financial Planning (401k) Simplified and Assist You To Plan For Retirement