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After switching to the new job, people would wonder what they should do with their old 401K plan. Which one is the best option?
Here are 4 choices I can think of. Maybe there are more options. I don’t know.
1) Do Nothing
2) Cashing out
3) Rollover to new work plan
4) Rollover to IRA
#1) Do Nothing.
I heard from radio said that people nowadays switch 10-15 jobs over their career lifespan. It sounds to me that the figure is a very high. But, I believe that it would happen to some people. Unlike the prior generation, people are loyal to their company and work there for the entire career. In fact, I just attended a retirement party in my agency. She is 63 years ago. Yet, she has been working in the agency for almost 40 years. I can’t imagine working in one company for such a long time.
People would enroll to the company retirement plan. Once they are leaving and do nothing to those retirement plan account, they would have many accounts all over different places. The problem is they would have way too many accounts to manage. Chances are they would forget which accounts they have already owned. Also, they probably don’t know their overall asset allocation and how to rebalance their accounts.
#2) Cashing Out
In my opinion, it is the most disadvantage option. You will be subject to ordinary income taxes and 10% penalty tax. I haven’t done it myself. But, someone who has done it told me it is one of the worst decisions she have made. She said that she almost got nothing after Uncle Sam dipped all the taxes and penalty.
#3) Rollover to new work plan
Some people roll money into the new work place. It is one of the good decisions. It would help them to consolidate into one single account and easy to manager. But, the only drawback is the selection of funds is limited.
#4) Rollover to IRA
The best option I recommend is to rollover money into IRA. The following is an email conversation I had with one of my close buddy about rollover money to IRA.
________________________________________________________________________________________________________________
Hi C, what’s up? How are you? Congratz to you about finding a new job. It is about time anyway. Here is my piece of suggestion about your 401K account. I suggest you to roll them into IRA.
From what you said, your 401K is pre tax, so, you need to roll money into Rollover/Traditional IRA. DO NOT roll into your ROTH IRA.... I don't know what exactly it is going to happen. But, I can foresee it will be a series of tax complication down the road.
Here is the general guideline for rolling different type of 401K.
Pre-tax 401K --> Rollover IRA
ROTH 401K --> Roth IRA
401K have both Pre Tax and ROTH. Make sure 2 separate checks. One for Pre-tax and one for ROTH.
In your mind, you might think about convert your Pre-tax 401K $$ into ROTH. That's different topic and I can discuss it later. That's another big topic.
So, here are the steps for doing the rollover.
Step #1). Open up ROLLOVER IRA account. There are many places offer IRA, such as ScottTrade, TDAmeriTrade, Charles Schwab, Merrill Lynch, etc... So, whatever you pick and open up the account their first and you should have account #. Please keep this account number handy.
Step #2). Contact your 401K provider, eg. Fidelity. When you call them, you tell them that I want to roll out $$ from my 401K into an IRA.
Once the representative aka saleperson hear this statement, they will find a way to convince you to open up Rollover IRA in Fidelity. They will tell you how good they are, blah, blah, blah. You can simply say "you are all set." Actually, Fidelity service is not bad, but, the commission fee is high. Around $70 fee when you buy a mutual fund.
Let say if you have already open up Rollover IRA in TDAmeriTrade. You will tell them the payable is TDAmeriTrade. By telling the payable is TDAmeriTrade, it mean the $$ won't go to you and you won't get tax for doing this transition. In fact, you will still get a Form 1099 that you have made this distribution. It is just FYI. So, DO NOT tell them to put your name as payable to.
In additional, tell the representative that to put the following information in the memo, "FBO: {your name}, and Account number." Depend on what investment company, I know Fidelity don't put the account number for you. In this case, you will write down the account number yourself once you receive the check.
Also, the representative might ask you where you want the check to be mailed. I personally, like to send it to my home address first. Then, I can make a copy of my own to keep the record. Of course, you need to verify your home address to them as well.
Oh, they will probably ask you whether you have read the waiver, or agreement that you understand this process. The reason is when they issue a check to you, you need to deposit to IRA account within 60 days. Otherwise, it will consider you to withdraw $$ from 401K, and they will tax you plus 10% penality. So, they want you to fully aware of that.
Step #3). Once you receive the check, you can bring the check into one of the branches. I know for TDAmeriTrade, the branch is in Post Office Square. Don't get confuse between TDBank and TDAmeriTrade. They are 2 different branches.
Step #4). Once you deposit $$ into your Rollover account, you can buy whatever you want to buy. Eg. stock, mutual fund, ETF, whatever. Unlike your 401K, you only have very limited selections.
Hope this information will give you a good start man. Good luck…
________________________________________________________________________________________________________________
Conclusion: What do you do with your previous company salary saving plan and pension plan account? BTW, if you ex-company offer some sort of pension, they can roll over to IRA as well.
Here are 4 choices I can think of. Maybe there are more options. I don’t know.
1) Do Nothing
2) Cashing out
3) Rollover to new work plan
4) Rollover to IRA
#1) Do Nothing.
I heard from radio said that people nowadays switch 10-15 jobs over their career lifespan. It sounds to me that the figure is a very high. But, I believe that it would happen to some people. Unlike the prior generation, people are loyal to their company and work there for the entire career. In fact, I just attended a retirement party in my agency. She is 63 years ago. Yet, she has been working in the agency for almost 40 years. I can’t imagine working in one company for such a long time.
People would enroll to the company retirement plan. Once they are leaving and do nothing to those retirement plan account, they would have many accounts all over different places. The problem is they would have way too many accounts to manage. Chances are they would forget which accounts they have already owned. Also, they probably don’t know their overall asset allocation and how to rebalance their accounts.
#2) Cashing Out
In my opinion, it is the most disadvantage option. You will be subject to ordinary income taxes and 10% penalty tax. I haven’t done it myself. But, someone who has done it told me it is one of the worst decisions she have made. She said that she almost got nothing after Uncle Sam dipped all the taxes and penalty.
#3) Rollover to new work plan
Some people roll money into the new work place. It is one of the good decisions. It would help them to consolidate into one single account and easy to manager. But, the only drawback is the selection of funds is limited.
#4) Rollover to IRA
The best option I recommend is to rollover money into IRA. The following is an email conversation I had with one of my close buddy about rollover money to IRA.
________________________________________________________________________________________________________________
Hi C, what’s up? How are you? Congratz to you about finding a new job. It is about time anyway. Here is my piece of suggestion about your 401K account. I suggest you to roll them into IRA.
From what you said, your 401K is pre tax, so, you need to roll money into Rollover/Traditional IRA. DO NOT roll into your ROTH IRA.... I don't know what exactly it is going to happen. But, I can foresee it will be a series of tax complication down the road.
Here is the general guideline for rolling different type of 401K.
Pre-tax 401K --> Rollover IRA
ROTH 401K --> Roth IRA
401K have both Pre Tax and ROTH. Make sure 2 separate checks. One for Pre-tax and one for ROTH.
In your mind, you might think about convert your Pre-tax 401K $$ into ROTH. That's different topic and I can discuss it later. That's another big topic.
So, here are the steps for doing the rollover.
Step #1). Open up ROLLOVER IRA account. There are many places offer IRA, such as ScottTrade, TDAmeriTrade, Charles Schwab, Merrill Lynch, etc... So, whatever you pick and open up the account their first and you should have account #. Please keep this account number handy.
Step #2). Contact your 401K provider, eg. Fidelity. When you call them, you tell them that I want to roll out $$ from my 401K into an IRA.
Once the representative aka saleperson hear this statement, they will find a way to convince you to open up Rollover IRA in Fidelity. They will tell you how good they are, blah, blah, blah. You can simply say "you are all set." Actually, Fidelity service is not bad, but, the commission fee is high. Around $70 fee when you buy a mutual fund.
Let say if you have already open up Rollover IRA in TDAmeriTrade. You will tell them the payable is TDAmeriTrade. By telling the payable is TDAmeriTrade, it mean the $$ won't go to you and you won't get tax for doing this transition. In fact, you will still get a Form 1099 that you have made this distribution. It is just FYI. So, DO NOT tell them to put your name as payable to.
In additional, tell the representative that to put the following information in the memo, "FBO: {your name}, and Account number." Depend on what investment company, I know Fidelity don't put the account number for you. In this case, you will write down the account number yourself once you receive the check.
Also, the representative might ask you where you want the check to be mailed. I personally, like to send it to my home address first. Then, I can make a copy of my own to keep the record. Of course, you need to verify your home address to them as well.
Oh, they will probably ask you whether you have read the waiver, or agreement that you understand this process. The reason is when they issue a check to you, you need to deposit to IRA account within 60 days. Otherwise, it will consider you to withdraw $$ from 401K, and they will tax you plus 10% penality. So, they want you to fully aware of that.
Step #3). Once you receive the check, you can bring the check into one of the branches. I know for TDAmeriTrade, the branch is in Post Office Square. Don't get confuse between TDBank and TDAmeriTrade. They are 2 different branches.
Step #4). Once you deposit $$ into your Rollover account, you can buy whatever you want to buy. Eg. stock, mutual fund, ETF, whatever. Unlike your 401K, you only have very limited selections.
Hope this information will give you a good start man. Good luck…
________________________________________________________________________________________________________________
Conclusion: What do you do with your previous company salary saving plan and pension plan account? BTW, if you ex-company offer some sort of pension, they can roll over to IRA as well.