When someone talks about 401k advice they generally think of advice about what kind of investments you make within your 401k account.
This type of advice usually centers around whether you invest in money markets, bonds, stock investments or mutual funds.
The secret to 401k advice is learning how to manage the administration of your account because that is just as important as where to invest your money. Managing your account means making decisions about your options; but first you have to know what your options are.
When you change employers, what can you do with your money? If you become unemployed what can you do? When you retire, what options are available to you?
Should you keep your 401k assets in the old employer’s plan or is it better to make a 401k rollover to IRA transaction or a 401k transfer to another 401k account? The best way to handle your 401k account all depends upon how much control you want over your investments. You do have a few decisions to make so let’s break down your options.
The Secret to 401k Advice:
401k options when changing employer’s:
Leave the money in your old employer’s plan.
- You may have less control this way.
- You remain subject to the rules of their plan.
- If there are changes, you may not hear about them. Since you are no longer at the company, you may not get the emails, or internal memo’s.
- Managing your account without being in direct contact is the more difficult way to handle things.
401k transfer to your new employer’s 401k plan
- Before you take your money with you to your new employer’ plan make sure they accept transfers, not all plans do.
- Analyze the investment options; make sure your new employer’s 401k plan has the same types of investment choices your old plan had.
- You may not like the new investment options in your new employer’s 401k plan.
401k rollover to IRA.
- Sometimes retirement assets in an IRA can be easier for you to personally manage than if those assets remain in a 401k plan from a previous employer.
- In an IRA your assets are not protected from creditors in case of a personal bankruptcy.
- Your assets are protected from creditors if kept in a 401k plan.
- An IRA account may offer more investment choices than a 401k plan.
- An IRA account is more mobile than a 401k account.
- It is easier to move your account balance in an IRA around to different financial institutions if you choose to.
- Be mindful of the fact that you cannot take loans against an IRA account like you can against a 401k account balance.
- The fees in an IRA account can sometimes be higher than a 401k account.
Your options if you become unemployed:
- If your retirement assets are still within a 401k account, you can take loans against the balance.
- Not all 401k plans are set up to allow for loans, check with your 401k plan administrator.
- The interest rates on a 401k loan are required by law to be reasonable.
- If the loan is not paid back, it can be considered by the IRS to be a distribution and subject to tax and penalty rules.
- If you transferred your assets to an IRA, you cannot take a loan against the account.
Your options if you retire:
- You can rollover your 401k account balance to an IRA.
- You can take a lump sum distribution from your 401k, but that may push you into a higher tax bracket, so be careful.
- You are not required to take distributions from a qualified plan (a traditional IRA or a 401k account) until age 70 1/2.
- You can begin taking distributions as early as 59 1/2.
- Check with your financial adviser on what option works best for you.