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New job comes with a tough choice on your old 401(k): move or not?

One of the most important decisions you will make when you get a new job is whether to take your 401(k) savings with you. • That is, you must decide whether it's better to leave the money invested in your former employer's plan or move it to your new employer's plan. • What you don't want to do is to cash out the money.

"The No. 1 priority is to preserve this money for retirement," said Ken McDonnell, director of the American Savings Education Council. "You will be 65 at some point in time."

If you cash out, the money will no longer be growing for you, and there will be costly tax consequences.

If you keep the money, you must pay federal income tax on the entire amount. Plus, if you're not at least 59½, you would also owe a 10 percent early-withdrawal penalty.

So you could wipe out a huge portion of the original amount.

In deciding whether to move your 401(k) to your new employer's plan, consider these factors:

Investment options

"Are you happy with the investment choices you have in the old plan? If the answer is yes, then you will want to consider leaving the money there," McDonnell said. "That should be your first consideration."

If you decide to keep your 401(k) in your former employer's plan, be sure to stay in touch with the company.

"Laws change, and the plan document will change as a result of these legal changes," McDonnell said. "Updates need to be sent to the participants."

Plan fees

How do the fees in your new employer's plan compare with those in your old plan?

This is important, because high fees can exact a heavy toll on a 401(k) plan over the course of an employee's career.

The problem: Workers trying to determine their expenses are at a loss, because the fees aren't clearly disclosed.

The Department of Labor has issued rules that require companies providing services to 401(k) plans to disclose the fees they charge and any conflicts of interest.

The agency is developing rules that would improve fee disclosure to workers.

Double duties

If you decide to leave your 401(k) with your old employer and also participate in your new employer's 401(k), you may find it unwieldy to manage two separate accounts.

"Having two plans in two different places is a lot to keep track of," said Christine Fahlund, senior financial planner at T. Rowe Price. "For some people, they may just like the idea of having their money in separate buckets, and they leave money with the prior employer because it helps with this mental accounting."

But since the goal of both funds is to finance your retirement, "you want the same asset allocation on each one, and that becomes a pain if you're having to rebalance and worry about asset allocation in each one," he said.

Plus, as you get closer to age 70½, you'd want your retirement assets in one place to prepare for legally required withdrawals.

"By then you want to consolidate because you're suddenly subject to required minimum distributions, and if you have three different plan accounts all with former employers you've got to make sure that you're taking the required minimum distributions from each one," Fahlund said.

Other options

Besides your new employer's 401(k), you can also roll your money over to a traditional IRA or Roth IRA. But be aware of fees.

"Your probability of paying administrative fees is higher with an IRA than in a 401(k)," McDonnell said. That's because a 401(k) plan is a company benefit, and larger employers tend to pay the administrative fee, he said. "When you go into an IRA, it's just you."

If you roll over assets from a workplace retirement plan to a Roth IRA this year, special rules allow you to include half of the taxable income on your 2011 tax return and half on your 2012 return.

New job comes with a tough choice on your old 401(k): move or not? 10/23/10 [Last modified: Saturday, October 23, 2010 4:31am]
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