Advising customers on old 401 (k) accounts


With people changing jobs many times over the course of their careers, it’s likely that your customers will eventually have several old 401 (k) accounts available. They will ask you for advice on the best options for managing these key pension funds.

Switch to an IRA

This can be a solid choice for many of your customers. This can be a good way to integrate these funds into the investment strategy you have already put in place for your clients’ investments. In many cases, you will be able to invest these pension resources in a better and cheaper combination of investments than the client might have available in their previous employer’s 401 (k) plan.

If the old 401 (k) is in a designated Roth account, it will generally make sense to transfer that portion to a Roth IRA account. Roth 401 (k) accounts are subject to the minimum distributions required; Roth IRAs are not, so for customers who are approaching the age when RMDs come in, this is particularly important.

Use unrealized net appreciation

Some customers may hold shares of their employer’s capital within the 401 (k) plan. For these customers you might consider using a set of rules within the tax code called unrealized net appreciation or NUA.

NUA rules allow the customer to distribute shares in kind to a taxable account. They can still transfer the balance of the 401 (k) account that is not invested in the company’s shares to an IRA to maintain the deferred tax nature of the account.

NUA treatment involves the payment of taxes based on the cost of the actions. They can therefore be held and sold later. The potential advantage is that if held for at least one year after distribution, earnings will be taxed at preferential capital gain rates, compared to ordinary income rates if the shares were transferred to an IRA and subsequently withdrawn from the retired account.

The entire account must be distributed within the same calendar year for NUA rules to apply.

Whether NUA is the right strategy for customers with employer shares in their 401 (k) is an analysis that will have to be done on a case-by-case basis.

Leave the money in the old plan

This could be a good option for your client in some cases. For example, if the plan offers a solid menu of low-cost institutional quality investment options that you may have trouble replicating outside of the plan, leaving money may be a good option.

In general, however, it is probably a good idea to move the money to a new destination when the client leaves his employer.

Enter the money in the new employer plan

If your client is moving to another job, it may make sense to transfer his 401 (k) funds to the new employer’s plan. There are a number of reasons that may make sense.

If your client works and is approaching the age at which the required minimum distributions come into play, this can be a way to defer RMDs on this money. If their new employer’s plan has chosen this option, the RMDs on the money in that plan may differ if they are still working and are not 5% or more of the owner of the company.

If your client is making a Roth IRA conversion, having this money somewhere else than a traditional IRA account can be potentially tax advantageous for the customer during the conversion.

Moving the funds here will allow some degree of consolidation of the client’s pension funds compared to those left in the old plan, it’s a less bucket of money to supervise for you and the client.

An important part of the decision will be the quality of the investment in the new employer’s plan and the plan’s expenses.

Early distributions at the age of 55

For those customers who are at least 55 years old and less than 59½ years old, there is an IRS provision which allows for penalty-free distributions from an old employer’s 401 (k) if certain provisions are met.

The “55 rule” can be used if the customer leaves his job no earlier than the calendar year in which he reached the age of 55.

This applies to employees who voluntarily leave their jobs or who are laid off or laid off and this opportunity applies to both plans 401 (k) and 403 (b).

This is limited to the resources in your current employer’s plan, it cannot be used for a 401 (k) plan from a previous employer.

If your client knows that he will be in this position before the age of 59 and a half, this could indicate the possibility of transferring all the old 401 (k) money to his current employer’s plan if they would like to have access to those funds for a distribution. without penalty.

These advance distributions will still be subject to applicable income taxes.