401k withdraw funds or switch companies?

Question

I recently left my job. They provided a 401k and its currently at ~$10K. What do I do now? I'm relatively young and this is my first time dealing with a 401k. My questions are...

1. Do I have to withdraw the funds? Switch companies? Can I keep everything where it is?

2. How can I set up a LONG term retirement account that has the same or similar tax and other benefits and is independent of any future employer.

I would still like the option to loan myself money from that account if needed. I don't know if this was just a feature of the company(ta-retirement) I was with or a standard thing.

Answer 1

You can't get a loan from an IRA. You cannot get a loan from your 401(k) plan with your previous employer; 401(k) plans do not give loans to ex-employees, only current employees. Thus, if you want to have the flexibility of getting a loan from the money in the 401(k) plan with your ex-employer, your only option is to roll it over into the 401(k) plan of your current employer. But be aware of the negatives in doing so, some of which are discussed in the answers to Why would you not want to rollover a previous employer's 401(k) when changing jobs?.

Answer 2

Companies usually have a minimum account balance required to keep a 401k for former employees. You will have to check whether $10k is sufficient to keep your funds in your former employer's 401k. If you are below their threshold, you will have to move your money. One option is to rollover into the new employer's 401k.

You can rollover a 401k into a traditional IRA account that is independent of your employer. A traditional IRA has the same tax benefits as a 401k; it grows tax-free until you withdraw money from the account. Companies that offer IRAs include Vanguard, Fidelity, TIAA.

Many companies have significant overhead costs in the their 401k management. It may be better for you to rollover your money into an IRA to save on these costs.

I am not knowledgeable about loaning from retirement accounts, so I cannot help with that.

Answer 3

Good question. And it depends a bit on your current plan, your future income, and the plan you are moving too.

Mostly you want to roll out of your existing 401K. There will likely be a fee, and your investment choices are limited. You will want to do a direct transfer, and going with a quality company such as Fidelity or Vanguard. Both of those have zero fees for accounts and pretty good customer service.

However, if your future income is likely to be high there is something else to consider. If you are over the limits do a ROTH, and are considering doing a "Backdoor ROTH" a key success for this strategy is keeping your roll over IRA balance low (or zero).

So you may want to either leave the 401K where it is, or roll it to your new 401K plan. In that case you will have to call the two 401K custodians, and select the best choice as far as fees and fund choice.

Answer 4

Rolling an old 401k into a new 401k is generally only for ease of management. For example, how many bank accounts do you really want? As long as the funds are reasonably allocated I've found it can be a useful "mind game" to leave it separate. Sometimes it's desirable to ignore an account and let it grow, and it is a nice surprise when finally adding all the account balances together. In other words, I keep thinking I've got X (the amount of my biggest or current 401k), which affects/helps my habits and desire to save. When I add them all together I'm shocked to find out I've got Y (the total of all accounts).

Personally, I've had big paperwork problems transferring an old 403b (same type process as 401k) even when I had an adviser helping me move it. In the end it was worth moving it, because I'm having the adviser manage it.

I'm actually writing this answer specifically because I recently moved a big 401k into a Traditional IRA. A rep from the brokerage, representing my previous employer, kept calling me to find out how they could help (I didn't brush him off). I found that using an IRA provided me with the opportunity to do self-guided investments in funds or even individual stocks, well beyond the limited selection of the old company's 401k. It was useful/interesting to me to invest in low-fee vehicles such as index funds (ie: the Buffett recommendation), and I'll find some stocks as well. Oh and when the old company 401k has certain funds being discontinued, I didn't want to notice the mandated changes years later.

So, I'd suggest you consider management and flexibility of the 401k or equivalent, and any of your special personal circumstances/goals. If you end up with a few retirement accounts, I suggest you use an account aggregating website to see or follow your net worth. I know many who, based on various concerns and their portfolio, find an acceptable website to use.