Have you left any 401(k)s behind?

Gwen Garrison |

There’s an old adage: Never leave money on the table.  But job changes can leave a chain of stranded 401(k)s (your retirement money!) under former employers’ plans until you retire. But that may not always be the best strategy.

We have had a large number of clients lose track of their employer retirement plans because they moved and did not provide a change of address for the plan.  Other times, they lose track of the plan because the company is bought, merged, or goes out of business, and the client no longer knows how to contact them.  A client once found $100,000 by contacting all of his previous employers.  Needless to say, he was thrilled.  Although you want to consider the pros and cons of rolling over your retirement plan to an IRA, consolidating retirement plans from previous jobs may be a good idea for you.

Consolidating can reduce paperwork and make it easier to balance investments, monitor their progress, plan a withdrawal strategy, and update beneficiary changes. It may reduce administrative fees, which can add up over time, especially when factoring compound interest.  Consolidating may also qualify investors for price breaks based on asset and trading thresholds.

While employer plans often accept rollovers from previous accounts, it’s wise to weigh the pros and cons of rolling former employer accounts into a personal IRA. Many 401(k) administrators don’t dispense individual advice to ensure investors make optimal choices for their situations. IRAs usually offer more personal advice, control, and flexibility. Typically, 401(k) plans include a few dozen funds to choose from, while IRAs encompass thousands of investment choices.1,2 

In addition, most employer 401(k)s do not offer any choices that provide guaranteed income.  Many clients can benefit from a strategy that dedicates a portion of their 401(k) assets to products that can provide guaranteed growth as well as create a guaranteed lifetime income stream.  The guaranteed income reduces the amount of distributions they have to take from their IRA or 401(k), often making the money last longer –especially in times of greater volatility.

IRA accounts can also provide more freedom in passing on funds. Under federal law, surviving spouses automatically receive their deceased spouses’ 401(k)s – unless the survivor has signed a waiver. IRAs usually allow multiple or contingent beneficiaries. The SECURE Act recently eliminated stretch IRAs, which allowed children and grandchildren to take minimum distributions from an inherited IRA over their lifetimes. However, there won’t be any tax on Roth withdrawals.

On the other hand, 401(k)s carry some unique benefits. They are protected from all types of creditor judgments.  In many states, annuities provide this protection as well.  Traditional and Roth IRA assets up to $1,362,800 are shielded from bankruptcy claims, but safeguards from creditors in other types of lawsuits vary from state to state. If you leave your job after the age of 55, you can take penalty-free withdrawals from a 401(k) account. The minimum age for withdrawing from an IRA without a penalty is 59½. You can take up to a 5-year loan from a 401(k); an IRA only affords a 60-day, tax-free rollover option. (The CARES Act provides some exceptions for early withdrawals from 401(k)s and IRAs and increases 401(k) loan amounts in 2020.)

Of course, it’s crucial to consider potential fees and tax implications before consolidating. It’s particularly wise to consult a tax professional if your 401(k) includes employee stock, as special tax rules may apply. Our office would be happy to help you decide if consolidating your accounts could be beneficial and to help you weigh advantages and disadvantages of rolling 401(k)s into a personal IRA.

Of course, there is a lot more to know about this subject, and your advisor can help you learn more.  But here’s enough to get you started.  Take the next step.  Book a free virtual or phone meeting today at www.lifeplanfinancialadvisors.com.  Feel free to share this information with anyone who will benefit from reading it.