Planning to change jobs? Here are some options for managing your 401(k)
By Brian Famigletti, Managing Director & Head of Marketing
Your 401(k) Options, Explained
Before changing jobs or stepping away from work, one of the first things on your to-do list should be to weigh the options for your 401(k). And while the choices may sound simple, the implications can have long-lasting impacts.
Typically, there are four paths:
- Stay in your old employer’s plan
- Roll into a new employer’s plan
- Move assets into an IRA, or
- Take a lump-sum distribution
Each option comes with tradeoffs. Staying put can make sense if your current plan offers low fees, solid investment options, and strong administration. Meanwhile, rolling into a new employer plan may simplify your financial life by consolidating accounts and aligning everything under one roof.
Moving to an IRA opens the door to broader investment flexibility, as you will no longer be limited to a preset menu. But flexibility often comes with higher costs and potentially less creditor protection, depending on your state, potentially making a lump-sum distribution look intriguing.
Watch for Hidden Costs
One of the biggest mistakes investors make when deciding which 401(k) option to choose is focusing only on convenience. Costs, taxes, and long-term impact are what truly make a difference.
IRAs can offer more control, but that control may come with higher advisory fees or trading costs. Meanwhile, 401(k) plans often benefit from institutional pricing, which can quietly boost long-term returns.
Taking a lump sum may look tempting, especially during a transition period. But for pre-tax accounts, that distribution is typically taxed as ordinary income and can trigger penalties if taken too early. That turns a short-term liquidity decision into a long-term setback.
Even rollovers from one company to another require care. If you have both pre-tax and after-tax contributions, the way assets are transferred can affect future tax treatment — one example of how small decisions can create outsized consequences.
What’s Net Unrealized Appreciation?
If your 401(k) includes company stock, there is one strategy worth a closer look. It’s called net unrealized appreciation, or NUA. Here’s how it works:
Instead of rolling company stock into an IRA, you can transfer it into a taxable account. At that point, you only pay ordinary income tax on the original cost basis. Any gains above that may be taxed at lower capital gains rates when the shares are sold.
Think of it as converting part of your retirement balance from high-tax treatment to potentially lower-tax treatment. But it only works in specific situations and requires precise execution.
This situation underscores how planning matters when deciding how to handle your 401(k). If you would like to review your options and how they fit into your broader financial plan, contact Griffin Asset Management to speak with an expert.
