By Kelly D. Peterson, Financial Advisor, Global Wealth Management Division - Morgan Stanley
Starting a new job can be both exciting and stressful. One thing commonly overlooked is what to do with your old 401(k). You have diligently set aside this money, so what are your choices? There are four options for your 401(k) from a former employer, and a few of the pros and cons of each are listed below.
You can withdrawal your funds as cash. Cash out the account value and take a lump sum distribution from the current plan, subject to mandatory 20 percent withholding, as well as potential taxes and a 10 percent penalty, so this is rarely suggested. You set aside this money for retirement; keep it working toward that goal. If you do decide to take this option, always meet with a tax advisor first to learn how it may affect you.
Keep It Where It Is
Most plans allow you to keep your funds where they are. You may be subject to different fees than an employee, but you should retain similar access to the rest of the plan. 401(k) plans have low maintenance fees, which can be attractive to certain investors. A few drawbacks are being subject to future plan changes and being limited to investing in the funds selected by the plan.
Move It to Your New 401(k) Plan
Some 401(k) plans allow you to transfer funds from other accounts to their plan. This option makes tracking easier, which can help to ensure you are allocated correctly. You are limited to the investment choices available in your new plan, and your funds may be subject to new plan rules regarding withdrawal, penalties, and loans, so clarify the differences of your plans.
Rollover Into an IRA Finally, you can roll your funds into another qualified account, such as an IRA. IRA’s are similar to 401(k)’s. You receive a tax break for the money invested in an IRA, where 401(k)’s are invested with pre-tax dollars. The funds grow until you begin taking distributions, which can begin penalty free the year you turn 59 and a half. The distributions are added to your taxable income for the year, and the remainder stays invested. The benefit most people seek with an IRA is the ability to choose the investments for the account. While some securities are restricted from being held in an IRA, much of what is available in the market can be part of an IRA. You will most likely pay more in fees for an IRA versus a 401(k), but you may also see higher returns. Carefully weigh the pros and cons of an IRA versus a 401(k) and seek the advice of a financial advisor prior to making a final decision.
The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. Morgan Stanley and its Financial Advisors do not provide tax or legal advice. Individuals should seek advice based on their particular circumstances from an independent tax advisor.The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Smith Barney LLC, Member SIPC, or its affiliates.
Morgan Stanley Smith Barney LLC. Member SIPC.