When a plan participant leaves an employer a number of options are available with regard to their 401(k) plan. Participants, in many cases will actually withdraw the funds and pay the penalty. This is a hugh mistake and jeopardizes their ability to successfully retire in the future. Seeking the advice of a tax and financial professional is highly desireable. One great question to ask of a professional is ‘do they follow the fiduciary standard?’
- If you’re in the year when you’ll reach age 55 or older, maintaining the 401(k) plan gives you an option to begin taking distributions prior to age 59½ (as early as age 55) without penalty. If you move these funds over to an IRA, this option is lost.
- On the off-chance that you might need a loan from your retirement funds, you should know that IRAs do not have a loan provision. Retain at least some balance in the plan if you think you might need this option – but also you should check with your plan administrator to see if this option is available for non-employee plan participants, because it might not be (and actually, it likely is not). But keeping in mind #4, if you’ve maintained a healthy balance in the plan and you return to work with this same employer, you’d have a much larger account to work with if you needed to borrow.
- Funds in a 401(k) account are protected by ERISA – and as such are generally not available to creditors. Depending upon the state you live in, IRA assets may be available to your creditors in the event of a bankruptcy. At any rate, ERISA protection is pretty much an absolute, so this is yet another reason you might consider leaving funds in a former employer’s 401(k) plan. Funds moved from an ERISA-protected account can carry the protection on to the IRA, but new contributions to the account are not covered by ERISA.
This just part of the points to consider. Another point of value is when you own company stock in your plan. If you follow certain limitations you can utilize the Net Unrealized Appreciation NUA option.
Please comment or call to discuss all your options.