Earlier this year I changed jobs after being with my prior employer for over 16 years.
Beyond the adjustment of that change at a personal level, there was also a financial decision to be made–and that was what to do with the 401(k) through my prior employer.
Rather than cover the various options in detail here, I will approach this from the perspective of how I approached this decision and what I have ultimately done. With that said, there are four basic choices to be made with an old 401(k) plan:
- Keep the money in your former employer’s 401(k) plan
- Roll the money into your new employer’s 401(k) plan
- Move the money into an IRA
- Cash out and receive the money as a distribution
Take It Slow
Often times it will take some time to adjust to the change of jobs, and therefore I believe it is important that you don’t rush into making a decision on what to do with the old 401(k) plan.
Once you have had a chance to digest the change, you can review the options and decide what will work best for your situation.
It is important to note that depending on the amount invested in your old plan, you may not have all of the above options available to you–and therefore you may have a limited time to make your decision. However, in many cases that is still usually between 30 days and 90 days, but check with your old employer and/or the account provider.
Evaluating My Options
For me, and I would hope it would be the same for most, the last option of cashing out is not an option that is desirable. Not only would there be an early withdrawal penalty but there would also be income taxes due on the distribution.
Therefore it was easy to eliminate that decision.
With the remaining three options, one of the big considerations is what investment options are available under the old 401(k) and new 401(k) plans. The choice to move the money to an IRA is the one with the most flexibility as you then have full control over how to invest that money.
Given my new pursuit of dividend growth investing, that option is certainly enticing.
However, as a long-time index fund investor and one that is currently on track for early retirement based on my investments in said index funds, I had to weigh the impact that this might have on those plans.
With the intent to keep money invested in index funds, there is appeal to keep the money in either of the 401(k) plans as the index funds offered in corporate plans may have an expense ratio that is better than what one can get individually–although the new zero fee index funds from Fidelity may be changing that picture.
Recognizing that my strategy to reach FIRE has been built on a base involving index funds, I was not comfortable completely changing course and putting all of that money into my dividend portfolio.
However, I have decided to implement a mix of two options–roll the money into my new employer’s 401(k) plan and move money into an IRA, and both will have a flavor that ties back to dividends.
The two 401(k) plans had very similar fund options with expense ratios that were a wash.
One big difference is that my new employer’s 401(k) plan offers Fidelity index funds, and as seen in my recent dividend income report, some of those index funds pay dividends. My old employer’s 401(k) plan had investments managed by Northern Trust and their index funds did not distribute dividends.
The majority of the funds from the old plan have been moved into the new plan.
Where I have deviated from that plan is with the portion of the old 401(k) that was invested in an international fund. It has largely under-performed and with the funds I have moved into the new plan I already have adequate international coverage for my liking.
Therefore, I am selling my holding in the international fund and having those funds moved into the Rollover IRA that was recently opened as part of my pension rollover.
These funds will be invested into my DGI portfolio and provide another nice influx of cash to dividend paying stocks.
It is important to remember that there is no “one size fits all” solution when deciding what to do with your old 401(k) and the answer that is right for me may not be right for you.
In my particular situation, I believe that my decision to direct the majority of the funds into my new employer’s 401(k) plan maintains my overall strategy to reach my FIRE goal while directing a portion of the money to my IRA will allow me to step up my long-term goals for how much of our retirement income can come from dividends.
On the plus side, I could not have had better timing on making this change either, as one of the Fidelity funds that I directed money into within the new 401(k) plan has just paid out a dividend that included my new shares!
Have you faced this decision with an old 401(k) plan?
What do you think about my decision?