While rollovers are common, there are times when leaving your 401(k) with your former employer may make sense. This article provides some really excellent insights.
Better Options, Lower Fees
The first reason you may want to consider leaving your 401(k) behind is the possibility of better investment options and fees.
Simply put, if your new job has everything you’ve ever wanted, except a retirement account that provides you good choices and low fees, why not just leave it where it is?
Fewer options and higher fees, according to the article, are most common when moving from a large company to a smaller company, because larger companies often have the kind of assets that give them negotiating leverage to implement lower portfolio management fees.
Early Access to Retirement Funds
Another reason for keeping your account with your former employer may be the possibility of eventually needing early access to your retirement funds.
If you leave your job during the year of your 55th birthday and you think there’s a decent shot you’ll need to withdraw from the money inside your retirement account prior to turning 59 ½, it’s probably best to leave that money right where it is. Or, if not all of it, at least a chunk of it because of the rule of 55.
This rule dictates that if you retire, move on, or are let go during or after the calendar year in which you hit 55, you’re permitted to take withdrawals from your 401(k) without being slapped with the dreaded 10 percent early withdrawal penalty.
But bear in mind that you’ll still owe your ordinary income tax on the money you withdraw.
Access To Stable Value Fund
Access to a stable value fund might also be a reason to leave your account with your former employer. These funds offer stability and competitive yields, which can be particularly beneficial for those nearing retirement and looking for conservative asset allocation options.
Many 401(k)s offer stable value funds that combine fixed-income securities and insurance contracts to help maintain principal, which are unavailable outside of 401(k) plans.
Possible Downsides
The first potential downside is that you won’t be able to keep making contributions to your plan once you leave your company, which could possibly diminish your compounded growth because the account will only provide returns based on the account balance on your last day with the company.
You may also be charged a higher annual maintenance fee as a former employee.
Furthermore, you lose the opportunity to borrow from your 401(k) after you leave. Many employers permit their current employees to take loans of as much as 50 percent of their 401(k) balance, up to a max of 50,000 dollars. Generally, those loans must be paid back within five years, with interest that eventually goes back to you.
Our team recommends tremendous caution when it comes to taking a loan from your 401(k) because you may have other, better options. But the fact remains that leaving your 401(k) with your previous employer eliminates this option entirely.
Comments