With more people changing jobs frequently during their working careers, many of your clients will have a number of old 401(k) accounts over the course of their working lives. They will need your help in managing these key retirement savings as part of their overall financial and retirement planning efforts. For those clients who may end up losing their jobs in light of the economic downturn caused by the coronavirus, your guidance is especially critical at this juncture.
Weighing Your Client’s Options
The main options for your client include:
- Leave the money in their old 401(k) plan
- Roll the money over to a new employer’s 401(k) plan if applicable and if the new employer’s plan allows for this
- Roll the funds to an IRA account
- Utilize the net unrealized appreciation (NUA) rules if the client holds company stock in the plan
- Take a distribution of some or all of the money
Depending upon your client’s situation, any of these options can make sense. NUA is a very specialized situation and we won’t cover this below. Taking a distribution is usually not desirable, but in some cases, might be necessary for your client.
Pros and Cons of Various Options
Leaving the money in their old 401(k) plan
- Can be a good idea if there are outstanding low-cost investment options that may not be available to your client elsewhere
- Can contribute to “financial clutter” for your client by having an additional account to manage and monitor. This might also add an additional number of unrelated investment options to manage, something that is never desirable and especially not so in the current market environment.
Rolling the money over to a new employer’s 401(k) plan if applicable and if the new employer’s plan allows for this
- For clients who are at or nearing the age when required minimum distributions (RMDs) apply, having the money in their current employer’s plan can allow them to defer RMDs on this money if they are less than 5% owners of the business and the employer has made the appropriate plan election for this.
- For clients looking to do a backdoor Roth, this money will not count against their total amount in a traditional IRA when calculating the tax on the conversion.
- If the new employer’s plan does not offer high-quality investments and low costs, there are better options for their retirement savings.
Roll the funds into an IRA account
- Allows the widest range of potential investment options
- Allows you to manage this money in line with other assets under management for the client
- Could be subject to RMDs while the client is still working
- Could cause higher taxes on a backdoor Roth or related strategy
Considerations Given Current Market Volatility
Helping clients manage their old 401(k) plan is always a crucial task for you as their financial advisor. It is even more crucial in this current period of stock market volatility. It can be easy for clients to neglect money held in old 401(k) plans; these funds can easily be forgotten.
You will want to ensure that this money is managed in accordance with other recommendations you might be making to your client, including rebalancing their accounts to get their asset allocation back in line with their target allocation. With asset values lower for your clients, all retirement money needs to be managed in a way that best helps your clients achieve their retirement goals.