Three choices with an old 401(k) account

Written by Nolan Baker Mark Clair | | letters@toledofreepress.com

Do you have an old 401(k) from a previous employer? We often times find that a lot of people leave their job and leave their 401(k). Not sure what your best option is? Leaving your 401(k) could be a great idea or a terrible choice. Here is a summary of the three different choices you need to know about. Those who are younger or only have a small account balance and have taken a new job or plan on getting a job in the future may want to consider transferring the old 401(k) into the new company’s 401(k) plan. Most people are not aware of the fact that if balance is low, typically $5,000 or less, the previous employer is not required to keep the account open forever. After a limited amount of time, a check could be mailed out creating a taxable event and an additional 10 percent penalty for anyone under the age 59½. Transferring the money into the new 401(k) plan can help consolidate the accounts and could reduce wasted fees and expenses. The new 401(k) loan provisions could be an important option as well for a family without a large emergency account. The new 401(k) plan could continue to be the foundation for a family’s future retirement. The second option for people with larger balances is to leave the money where it is. Technically, an investor could leave the money in the current plan and would only need to begin to take distributions when they reach 70½. This strategy can make sense for someone who is between the age of 55 and 59½ and will need to take income off of their 401(k) plan. Some 401(k) plans allow a retiree access to the money after the age of 55; without the 10 percent tax penalty that could be applied in other retirement accounts. Be sure to check with your plan provider to see if these types of withdrawals are available, or leaving the money sit may not make sense. Rolling the money over into a self directed individual retirement account (IRA) is the third choice. Often times we feel this is the best option for the majority of people with old 401(k)s. For one, an investor now has the flexibility to choose how his money should be invested. In a 401(k) plan, an account owner is limited to the investment choices offered by the company plan. The 401(k) account owner also doesn’t have much, if any, control over decisions made about the plan. On the other hand, the IRA will give the account owner control, flexibility and unlimited choices over how his or her money is invested. But watch out, if you fill out the rollover paperwork wrong, you could get stuck with a 20 percent tax withholding! The recent law changes on planning for your family also make the IRA a more attractive option. Certain IRA companies that hold your account, called custodians, offer your family more choices when you die, avoiding a potential 41 percent tax trap. This is called a multigenerational IRA and gives a family the ability stretch out the taxes over their lifetime. Although law changes like the Technical Correction Act of 2007 were passed to fix problems from the previous tax law changes, a stretch out 401(k) or IRA plan is not automatic! Take note, the law is a voluntary, not a mandatory, rule. So if the 401(k) account was opened before Jan. 1, 2008, or the retirement plan chooses not to offer this feature, it could still all be taxable to anyone besides your spouse. Imagine all of those years you spent building your retirement account to have your family lose up to 41 percent instantly just because you didn’t update your plan. So no matter if you leave the 401(k) or do the IRA rollover, make sure you completely understand your family’s distribution options at death and get it in writing. The recent round of pink slips around Northwest Ohio has put our unemployment at record levels. Many people find themselves in a situation they have never been in before. It’s at this point that many of the decisions you make are irrevocable. Other decisions will have a long term impact on your financial future. Get it right the first time. It’s like the big game with OSU versus Michigan in football, getting down the field is important, but the only thing that counts is scoring when in the end zone. And normally, it all comes down to the last 20 yards called the red zone. The retirement red zone works the same way. So before you make a move, be sure to check with a coach who knows the rules and has the playbook.

To learn more about starting your own self directed ira account, go to www.selfdirectediracorp.com