Leaving your 401k After Separation From Employment

There are pros and cons to leaving your 401k plan with your previous employer that should be evaluated before any moves are made. This is not an exhaustive list, just some main points to get you thinking about things that are involved.

  • Cost
    • There are several costs associated with Employer Plans, such as 401ks. There are a few places where you can get the details of your cost—the Summary Plan Description, the Summary Annual Report, statements and the internal expenses of the investment choices.
      • Summary Plan Description-typically you get this when joining the plan and any time there are material changes to the plan
      • Summary Annual Report-you should get this from your plan sponsor each year
      • Statements-sometimes there are fees on your statements
      • Internal Expenses of Investments-you should be able to access the Investments within the plan and get the fees associated with each one
    • All of these costs are available to you from your plan sponsor.
    • Group plans typically have lower fees-just like Costco, when you buy in bulk, you usually get a better price! However, cheaper isn’t always better. You have to weigh the options of the costs with the value and services you are receiving.
  • Investment Selection
    • Your investment choices are limited to the options within the plan. These investment options can change often—typically the investments are mapped to similar investments in the new plan.
  • Control
    • You are subject to plan limitations. Here are some examples:
      • You want to take $1,000 out of your account and have it come proportionately from all of your investments. Your plan may not allow this. You might only be able to take a specific dollar amount from an investment.
      • You want to take monthly distributions from the account now that you are retired. Your plan may not allow monthly distributions.
      • You may live in a state that taxes retirement plan distributions and your plan does not withhold state tax. You would then be responsible for making sure that tax gets paid-typically by paying quarterly estimates to the state or withholding more state tax from another account.
  • Qualified Charitable Distributions
    • You cannot make a Qualified Charitable Distribution from an Employer Plan—only IRA’s.
  • Employer goes out of business
    • Employers can terminate a plan for a variety of reasons, not just going out of business 1 . When an employer terminates a plan, they must distribute the vested assets to the participants in the plan, usually within 1 year. This is a good reason to keep your address and contact information up to date so that you know when this happens and you can plan accordingly.
    • If an employer files bankruptcy, generally the retirement assets are protected because they are required to be held separately from the employer’s assets 2.
  • Protection from Creditors
    • ERISA-The Employee Retirement Income Security Act-provides some federal protections from creditors—except for any taxes owed to the IRS or from a QDRO (Qualified Domestic Relations Oder from a divorce). ERISA plans are 401ks, Pensions, SEP IRA’s, SIMPLE IRA’s, Profit Sharing Plans and Employee Stock Ownership Plans (ESOP).
    • The BAPCA-Bankruptcy Abuse Prevention and Consumer Protection Act-provides some federal protection from creditors for IRA’s and ROTH IRA’s. The amount is indexed each year and is currently $1,362,800 3.

As always, you should consult with your legal, tax and financial advisors to make sure you have the information you need to make decisions based on your own situation.

1 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-termination-of-plan

2 https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-bankruptcy-of-employer

3 https://www.investopedia.com/terms/b/bapcpa.asp

Financial Journey LLC is a registered investment advisor offering advisory services in the state of Virginia and in other jurisdictions where exempted. Information provided is for educational purposes only and not, in any way, to be considered investment, legal or tax advice.

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