July 29, 2018
Every week, Simply Money’s Nathan Bachrach, Ed Finke and Amy Wagner are answering your financial questions in The Cincinnati Enquirer. If you, a friend, or someone in your family has a money issue or problem, please feel free to send those questions to firstname.lastname@example.org
Julie from Pleasant Ridge: I just switched jobs and I’m not sure what do with my old 401(k). Any suggestions?
Answer: You have a couple of different options.
In most cases, if your 401(k) balance is more than $5,000, your former employer will let you keep your money in your old plan. In the short term, that could be the best decision – it’s one less thing to worry about as you’re getting adjusted to your new job. You can always move it in the future. However, in this scenario, realize that you can no longer contribute to it, and if you choose this option too often when switching jobs, you could have a lot of old 401(k)s scattered about.
You could also roll your 401(k) into a traditional Individual Retirement Account (IRA). This could be a ‘self-directed’ IRA that you control yourself, or it could be an IRA that a financial advisor manages. It’s called a “rollover” because you’re taking one tax-deferred account (your 401(k)) and rolling it into another account with the same tax structure (the IRA). Just understand that IRAs (and financial advisors) also have fees, so you’ll want to compare what you were paying before to what you would be paying in the future.
Another option? You could potentially transfer your money into your new employer’s 401(k) plan. This option may make sense if your new plan has better investment choices, but you should compare fees in this scenario as well.
And while cashing out your 401(k) is an option, it’s not one we would recommend. Cashing out means you’re paying taxes and potential penalties to the government, and you’re also losing out on all the growth and compounding potential. Remember, Uncle Sam’s favorite option should be your least favorite option.
Here’s The Simply Money Point: There is no ‘absolute’ rule for what to do with an old 401(k). Find a trusted financial advisor, such as a CERTIFIED FINANCIAL PLANNER™ or Chartered Financial Consultant®, who will actually take the time to work with you to figure out the best strategy for your particular situation.
Craig in Mariemont: Please, be honest. Do I really need a financial advisor? Can’t I just invest in some low-cost index funds and save my money on all the advisory fees?
Answer: Honestly, yes, anyone can invest in low-cost index funds to save money on fees. But here’s the issue: you’re under the assumption that a financial advisor’s only value is to pick stocks or other investments for you. In reality, the real job of a fiduciary financial advisor (that is, an advisor who puts your best interests above their own) is much more comprehensive. A qualified advisor should be helping you figure out how all the competing components of your financial life work together – investments are just one aspect.
For example, an advisor also helps you with budgeting (“Can we afford that new truck?”), retirement planning (“Should we be saving in a Roth IRA or a traditional IRA?”), Social Security strategizing (“Does it make sense for me to wait until age 70 to claim?”), tax planning (“How can I reduce the amount of capital gains tax I’ll be paying?”), estate planning (“Does a trust make sense for the kids?”), insurance planning (“Should I buy an annuity?”), college funding planning (“Which 529 plan should we use?”), and legacy planning (“How can we make sure our church gets money when we’re gone?”).
And while you might have a good grasp on picking investments, do you have a grasp on all these other areas as well? If you do, that’s great. But perhaps the more important question to ask is, do you want to? You could spend hours researching whether or not to take that buyout offer, when to take Social Security, or how to plan for retirement healthcare costs, respectively. Don’t you have better things to do with your time?
The Simply Money Point is that, yes, financial advisors charge a fee. But so do lawyers, doctors, accountants, mechanics, and every other occupation that provides professional guidance and services. Ultimately, you need to decide for yourself whether or not the services you’ll be getting from a potential advisor are worth what you’re paying – remembering that, sometimes, the value comes from all the things you don’t have to deal with.
Responses are for informational purposes only and individuals should consider whether any general recommendation in these responses are suitable for their particular circumstances based on investment objectives, financial situation and needs. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing, including a tax advisor and/or attorney. Nathan Bachrach and Ed Finke and their team offer financial planning services through Simply Money Advisors, a SEC Registered Investment Advisor. Call (513) 469-7500 or email email@example.com.