Retirement Plan and Life Insurance Options
What do I do with my 401(k)?

by Glenn R Swift

You’ve just finished finding the kids a new school and getting settled into the new community when all of a sudden you ask yourself, “What should I do about my 401(k)?” All kidding aside, the key point here is that in the midst of moving, and all the other hassles associated with changing jobs, you can ill afford to lose sight of the finish line—retirement. So, what exactly are your choices? You basically have four options: 1) cash out; 2) leave it where it is; 3) roll it over into a rollover IRA; or 4) roll it over into a new 401(k) with your new employer. Let’s take a careful look at each.

Cashing Out

As for this option, here’s some sound advice…. Don’t do it! Not only will you miss out on future tax-deferred savings on the money, but you’ll get hit with paying taxes on the entire distribution PLUS a 10% penalty tax if you’re under age 59 1/2. Besides, this would set you way back with regard to saving for a comfortable retirement.

Leaving It Where It Is

If you’re happy with where your 401(k) is and want to keep it there, leaving it alone may be a viable option. Just make sure that your reasons for doing so are valid. To make a prudent decision, you should carefully examine each plan with regard to the various investment options, expenses, and borrowing privileges.

(Remember: Borrowing against your 401(k) should only be done as a last resort.)

Of course, you may find that there is a time limit with regard to how long you may keep your old plan before being forced to take action. Then again, if you have below a minimum dollar amount in your old company’s plan, your former employer may have the right to compel you to transfer.

Rolling It Over into a Rollover IRA 

If your new employer doesn’t offer a 401(k) or you’re confident that you and/or your financial advisor can do a competent job at managing your retirement funds, you may very well wish to roll your old 401(k) assets into a rollover IRA. Bear in mind that once you’ve rolled the funds over into an IRA you do not have the option of rolling them into a 401(k) with your new employer. You should also make sure that if you choose this route that the funds are transferred directly from your old plan’s custodian to your new. This is known as a trustee-to-trustee transfer and eliminates any mandatory withholding requirements on the part of your employer. Otherwise, if you were to first take possession of the funds directly, your former employer would be forced for income tax purposes to withhold 20% of your funds as a tax credit (mandatory withholding), even if you intend to roll it over later. If you do roll it over, and want to defer tax on the entire taxable portion, you will have to add funds from other sources equal to the amount withheld. Then again, another important reason to avoid taking the funds directly is that you then have but 60 days to roll the funds over before they become taxable.

Rolling It Over Into Your New 401(k)

Many folks feel that consolidating assets under one roof makes them easier to manage. If you decide to roll over your old 401(k) into your new plan, you should again make sure that you do so as a trustee-to-trustee transfer. You should also realize that if you do decide to transfer to your new employer’s plan, your decision is final; you cannot transfer it back once you have opted to transfer into your new 401(k).

What about my life insurance?

This is pretty straightforward. The fundamental issue here is ownership, meaning who controls the policy. If you own it, you decide. If your employer owns it, they decide. Still confused? Well, if you’re talking about an individual policy that you own, nothing changes. The policy stays the same.

If you are part of a group life policy, the insurance stays behind. In other words, you lose it! There is a possibility, however, that your group life plan may have a provision that allows you to break off your portion of the group plan. Sorry to burst your bubble but you can rest assured that you will find this option very expensive. To put it simply, this is only a good deal if you would be declined or highly rated elsewhere. So, if you’re reasonably healthy, it’s a bad deal.

Last, but not least, if you own a policy and your life insurance premiums are being automatically deducted from your paycheck, you need to inform your insurance company about your new employer.