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What to do with an old 401(k) or 403(b)
Weigh the pros and cons of the options.
If you have a 401(k), 403(b) or 457 plan at a former employer, you’re likely not sure what to do with it. That’s what we found out in a recent survey of those who made a job transition—almost a third were unsure of what to do with their workplace savings plan.1
You generally have four choices:
Here are some things to consider about each.
Option: Keep your 401(k), 403(b), or 457 plan with your former employer
Check your previous employer’s rules for retirement plan assets for former employees. Most, but not all, companies allow you to keep your retirement savings in their plans after you leave. If you have recently been through a drastic change such as a layoff, this may make sense for you. It leaves your money positioned for potential tax-deferred investment growth so you can take time to explore your options.
The benefits of leaving your assets in the old plan may include:
Some things to consider:
Option: Roll the assets into an IRA
Rolling your assets into an IRA still gives your money the potential to grow tax deferred, as it did in your workplace savings plan. In addition, an IRA often gives you access to more investment options than are typically available in an employer’s plan. For example, if you’re in or nearing retirement, you may want to consider using these assets to generate regular income payments. An IRA rollover provider can often help you create a retirement income strategy as well as offer products that provide guaranteed lifetime income, such as a deferred variable annuity with a guaranteed minimum withdrawal benefit2 that protects your income from market volatility and ensures that you can't outlive it.
If you have other accounts at a financial institution that offers IRAs, you often get combined statements. With that, you get a more complete view of your financial picture, which can make it easier to effectively manage your savings.
Other benefits of rolling over to an IRA may include:
But take into consideration that:
A special case: company stock
If you hold company stock in your workplace savings account, consider the potential impact of Net Unrealized Appreciation (NUA) before electing to make a rollover. Special tax treatment may apply to highly appreciated company stock if you move the stock from your workplace savings account into a regular (taxable) brokerage account rather than rolling the stock into an IRA. A Fidelity representative can help you understand if NUA may apply in your situation, and you should also consult with your financial or tax advisor.
Option: Consolidate your old plan assets into a new employer’s plan
Not all employers will accept a rollover from a previous employer’s plan, so you need to check with your plan administrator. If your employer does, the benefits may include:
But consider this:
Option: Cashing out
Taking the assets out should be a last resort. The consequences vary depending on your age and tax situation, because if you tap your 401(k) or 403(b) account before age 59½, it will generally be subject to both ordinary income taxes and a 10% early withdrawal penalty. In fact, in our survey, more than half (55%) who cashed out of a 401(k) said they would not make the same decision again.6
An early withdrawal penalty doesn’t apply if you stopped working for your employer in or after the year you reached age 55, but are not yet age 59½.
If you are under age 55 and absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.
A pitfall to avoid
If you choose to roll over your workplace retirement plan assets into an IRA, it is important to pay close attention to the details. To be on the safe side, consider requesting a direct rollover right to your financial institution. It’s also referred to as a trustee-to-trustee rollover and can help ensure you don’t miss any deadlines.
Why? If a check is made payable to you instead, your employer must withhold 20% of the rolled over amount for the IRS, even if you indicate that you intend to roll it over into an IRA within 60 days. If that happens, in order to invest your entire account balance into your new IRA within the 60 days, you’ll have to come up with the 20% that was withheld. If you don’t make up the 20%, it is considered a distribution, and you will also owe a 10% penalty on that money if you are under age 59½. When you file your income tax return, you will receive credit for the 20% withheld by your employer.
Once you receive the proceeds check in the financial institution’s name, you must deposit it into a rollover IRA within 60 days. If you don't, you'll be subject to a 10% early withdrawal penalty if you're under age 59½, and the money will also be considered taxable.
Making a decision
It's important to make an informed decision about what may be a significant portion of your savings. As discussed above, your choice will depend on factors such as your former and current employer’s plan rules, as well as your age and financial situation. In addition, you may want to think about your investing preferences, desire to consolidate your assets, and interest in receiving investment guidance. The table below provides a side-by-side comparison of the first three options. And once you make a decision, don’t forget to periodically review these assets, including what they’re invested in as well as the type of account. Your needs may have changed.
Finally, before you make a decision, consider:
A Fidelity representative can help you evaluate your situation and assist you in making the most of what you’ve saved:
1. The study was compiled from an online survey of 1,093 Fidelity participants who currently have an employer-sponsored retirement plan with a former employer, have stayed in their workplace plan since leaving their employer for at least 120 days, have at least $50,000 in plan assets, and are the financial decision makers for their retirement plans. The survey was hosted and administered by TNS between Oct. 21 and Nov. 22, 2010.
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