Don't Forget Your 401(k)Jonathan Zeminski, Vice President, Senior Financial Advisor, Wealth Management, Univest Bank and Trust Co.
The average American will work at seven employers during the course of their career. While we all aspire to find the perfect job, a 2010 study showed that 50% of us leave a trail of old 401(k) accounts behind. In fact, there are more than 15 million orphaned 401(k) accounts representing more than a trillion investment dollars.
So what should you do if you have an old 401(k)? While everyone's scenario is unique, the worst option is to take a premature distribution. Distributions received before age 59½ are subject to an early distribution penalty of 10% additional tax, unless an exception applies. The second-worst option is to do nothing at all. It can have several detrimental consequences including inappropriate investment risk, outdated beneficiaries, and compounded administrative and record-keeping expenses. The smart option is to consolidate your 401(k) accounts by rolling them into a new employer's plan or into an individual retirement account (IRA).
IRAs and 401(k) plans have their own pros and cons, but each option merits consideration. Typically, 401(k) benefits include low-cost investment options and lawsuit protection. Downsides include limited investment options and administrative and record-keeping fees, which averaged 1% for large companies in 2012. IRAs provide complete control of your account, broader investment options and estate planning benefits. However, they do not offer the same lawsuit protection found in many 401(k) plans. The estate planning benefits of IRAs are commonly overlooked by most retirees. IRA beneficiaries can take tax-deferred IRA distributions over their lifetimes and typically pay lower taxes. Most 401(k) plans pay out in a lump sum, which can result in beneficiaries paying dramatically higher taxes.
Whatever decision you make for your old 401(k), it is always best to seek credible information and guidance. If you have questions or need assistance, contact us at 484-947-2751 or email.
Securities and insurance products are offered through Univest Investments, Inc., member FINRA and SIPC, a licensed subsidiary of Univest Corporation of Pennsylvania. They are not FDIC insured, are not a deposit of or bank guaranteed, and are subject to risks, including possible loss of principal amount invested. Consult a tax advisor regarding what may be best for your personal situation.