Three 401(k) options when you leave a job

When you leave your current job, there are three options available to you for managing your previous 401(k).  You should consider all of the nuances before choosing an option that would work best for you. 

Option 1.  You can leave your existing 401(k) under your old company’s management.  This is the most straightforward and probably the most common option.  We tend to look forward to the new beginning and neglect to wrap up any loose ends.  In my practice I often encounter people with two or three small 401(k)s from their previous employers.   If you like the funds you have and they are not offered elsewhere, you can leave them in your existing 401(k) plan.  Just make sure you review all of your plans periodically and coordinate your investments towards the common goal.
 
Option 2.  You can roll over your existing 401(k) to a new 401(k) if your new company sponsors such a plan and allows participation from day 1.  This can be a good option if you like the new funds offered and would like to keep your accounts consolidated.  This option will not work if your new employment is contractual. 
 
Option 3.  You can roll your existing 401(k) to an independently managed IRA account.  This allows access to a great number of available retail funds, in addition to ETFs and individual equity stocks.  Many investors today also desire a portfolio that promotes Socially Responsible Investing (SRI), where special considerations are given towards sustainability, green technology, environmental stewardship, and/or other social causes.   This is a good option if you are unsure or are unsatisfied with the current performance of your existing 401(k) plan or are looking for more investment options. 
 
In addition to the above options, you must take care to consider your liquidity needs when deciding how to proceed with your existing 401(k) plan.  If the plan allows, the IRS permits borrowing 50% of your vested balance in your 401(k) plan up to $50,000 for special uses and often at comparatively lower rates.1  Some of my clients have used this option to pay off their high interest credit card debt or as a down payment for their home.  Borrowing from a traditional IRA is not permitted. 
 
If you already have a 401(k) loan leaving your job can be complicated.  When the employment relationship is severed any 401(k) loan is due immediately.  You can pay it back or roll it over to a new 401(k), provided that your new employer sponsors one and allows participation from day 1.  Otherwise your previous employer will issue a 1099-R and the loan will be treated as a distribution which is subject to income tax and 10% penalty if you are younger than 59 ½ years of age.
 
Advancing to a new career is a great opportunity to start working with a financial professional.  Developing the next focus in life and aligning your financial activities to that focus is the key to success in retirement.  401(k)s and IRAs are great tools that must coordinate with your other assets to maximize your net after tax retirement income.
 
 
 
 
 
 
 
This article was written by Peter Mu
 
Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS) 20 Bicentennial Circle, Suite 100, Sacramento, CA 95826  Securities products & services and advisory services offered through PAS, member FINRA, SIPC. Financial Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is an indirect, wholly-owned subsidiary of Guardian. Guardian, its subsidiaries, agents, and employees do not give tax or legal advice. You should consult your tax or legal advisor regarding your individual situation.  CA insurance license 0E19513
This material contains the current opinions of the author but not necessarily those of Guardian or its subsidiaries and such opinions are subject to change without notice. Material discussed is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, please note that individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice.
Withdrawals from 401(k) plans are subject to normal income tax treatment and if made prior to age 59­1/2 may be subject to an additional 10% federal income tax penalty. In addition, company imposed surrender charges may apply to certain withdrawals.
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#2017-38814 (Exp. 4/19) 
Ref 1: On borrowing 50% of balance, date of reference 2015-03-24.  http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/401k-Resource-Guide-Plan-Participants-General-Distribution-Rules
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