By Jessica Lanning, JD, CFP®

 

Recently, a client asked me whether transferring money from a previous employer’s 401(k) to her new employer’s 401(k) was safe. 

Like every decision, you have to weigh the pros and cons of this decision. Here’s what to keep in mind.

The Basics of an Old Employer 401(k)

You Have an Option to Transfer Your Old 401(k) to Your New 401(k)

 

If you’re changing jobs and your new employer offers a 401(k) plan, you typically can transfer the funds from your old employer’s 401(k) to the new one.

Depending on your needs, you can transfer the entire balance of your old 401(k) or a portion of it.

This can be a convenient option because it allows you to consolidate your retirement savings into one account, making it easier to manage.

The process is relatively straightforward. You’ll need to collect data from your new plan administrator and complete paperwork with your old plan administrator.  

You want these funds to go DIRECTLY from the trustee of the old plan to the trustee of the new plan. If the old plan insists on sending you a check, NEVER negotiate that check. Instead, send it directly to the new trustee.

 

You Have Other Options

While transferring your old 401(k) to your new one is an option, it’s not the only one. 

You can also keep the 401(k) in place with your old employer, roll it over into an individual retirement account (IRA), or withdraw the money and pay any applicable taxes and penalties.

 

Transferring Money to the New 401(k)

If you decide to transfer money from the old 401(k) to the new one, three issues come to mind about the “safety” of the new 401(k).

Remember Enron and Federated Department Stores

Both Enron and Federated Department Stores filed for bankruptcy. In Enron’s case, several people went to jail, employees lost their jobs, and their 401(k)s were practically wiped out.

While you cannot always see malfeasance happening, you can take steps to protect yourself.

 

Make Investment Decisions That Align With Your Risk Tolerance

First, remember that investing is risky, and there are no guarantees. There are no perfectly safe places to put your money. (Yes, not even in your mattress, where it’s losing value due to inflation and might get robbed or lost if the house is destroyed.)

Therefore, make investment decisions that align with your personal risk tolerance.  Educate yourself on what you are buying and be aware of the potential downsides of any investment, along with the fees associated with each.

 

Diversify Your Investments

Second, you should avoid having too much of one stock in your portfolio. Ideally, no single stock should comprise more than 5% of your overall holdings. 

You should also avoid owning too much of the company in which you work. If you do, your job and that stock are eggs in one basket. Not a good idea.  Diversification is key.

If you have a lot of one company’s stock in your 401(k), it’s time to diversify. Sell and invest in something else. Look at the net unrealized appreciation rule (NUA) and see if you can utilize it.

 

Consider Rolling Your Old 401(k) Into an IRA

Third, consider rolling your old 401(k) into an IRA. You will likely have better investment options and more control over that money. 

  • With an IRA, you can choose from a broader range of investments, including real estate, annuities, and other non-traditional options.
  • You can also make decisions about converting IRA funds to Roth funds if that works in your plan.  

 

There are some potential downsides to putting 401(k) money into an IRA, so be sure to consider these issues:

  • If you are over 55 but younger than 59.5 years old, it might be a better option to leave your 401k in place because you can typically access those funds penalty-free.  
  • Pay attention to the NUA rules if you have a lot of company stock in your 401(k).  
  • You may be able to borrow from your 401(k), even after you’ve left your employer.
  • If you have been doing “back door” Roth IRAs and wish to continue to do so, you should consult your tax preparer and financial planner about whether transferring your 401(k) to an IRA makes sense for you.

 

If you pay attention to your options and the risks and benefits of each option and make good, conscious decisions about your money, your chances of success increase dramatically.

If you want to talk about transferring your 401(k), please reach out.

 

 

Jessica LanningAbout the Author:

Jessica Lanning JD, CFP® brings focus and perspective to your individual financial needs to identify your opportunities for investment and wealth. Regardless of what you’ve done before or what “mistakes” you think you’ve made, Jessica can help get you back on track quickly and safely. As a former practicing lawyer, she brings a comprehensive approach to legal, tax, and financial challenges so that her clients can enjoy peace of mind. A huge proponent of conscious decision-making, Jessica makes sure her clients are educated and informed so that they make sound decisions with clarity and confidence. 

 

Lanning Financial Inc. is a registered investment adviser. The information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.

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