Retirement saving is an important and integral component of your financial plan. While there are many ways to save for retirement, one of the most popular and ubiquitous vehicles is a 401(k). Your 401(k) has allowed you, and your employer in the case of a match program, to facilitate and manage your retirement savings.
But what happens to that money should you decide to change jobs? There are many options for securing the funds in your 401(k) to keep you on track to maintain your retirement timeline.
Keep in mind that some of these options are more beneficial than others, but it is important to understand the full scope of your options. Let’s dive into the world of 401(k) plans.
1. Take a lump-sum
After you leave a job, you always have the option to cash out the funds in your 401(k), but many advisors instill a great deal of caution around this choice. While you would have access to all of the funds immediately, it could lead to serious tax consequences that cut into your nest egg in a significant way.
You are able to take qualified distributions from your 401(k) after you turn 59 ½ at which point you would avoid the 10% early-withdrawal fee. If you are younger than 59 ½, you would likely be charged the 10% penalty along with ordinary income tax on the full sum of the account, causing a windfall of tax burdens.
The only time you wouldn’t face the 10% penalty is if you retire between the ages of 55 and 59 ½ at which point you could withdraw any funds from your 401(k). You will, however, still need to pay income tax on all distributions unless the money is in a Roth 401(k).
Besides the tax considerations, a lump sum is often much too large of an amount of money for people to successfully invest and manage on their own, causing them to lose more money over time.
2. Leave it with your former employer
Many people might be surprised to learn that your 401(k) could still be housed in a company that you have moved on from. Some employers will allow you to retain your 401(k) even after you leave which is excellent for people who are happy with their portfolio and investment options.
If you have more than $5,000 in your account, most plans allow you to leave it in the account regardless of your employer. On the smaller end, if you have $1,000 or under in the account the employer may be able to force you to take the money elsewhere. Any account balance between $1,000 and $4,000 would force the company to help you set up an IRA to house the money.
Retaining your plan with your former employer may make a lot of sense if you have a lot of money accrued in the account and you are pleased with the portfolio management. But if you are likely to forget about it or are unimpressed with your options, taking a different course of action may be best.
3. Rollover into your new company’s 401(k)
Should you move to another company that also sponsors a 401(k) retirement plan, you can make arrangements to have the funds transferred from your previous account to your current account.
Be sure that you work directly with the custodians of both your old and new plans to make a direct transfer from the accounts. By ensuring that the money goes from one provider directly to another, you avoid a tax consequence or missing a crucial deadline.
You can also elect to receive the money from your old account in the form of a check and deposit that check into your new 401(k). If you do this, be sure to make that transfer within 60 days to avoid income tax on the full balance of the check.
Most new companies require the employee to put in a set amount of time before they are eligible for retirement benefits. In this case, be sure that you know what that timeline is so that you don’t liquidate your old account without having access to your new plan.
4. Rollover into an IRA
One of the most lucrative options for your old 401(k) is to roll the funds over into an individual retirement account (IRA). An IRA offers a much wider and more flexible range of investment opportunities than a 401(k) which gives investors the opportunity to allocate their funds in the way that they see fit.
IRAs are a flexible form of investing and gives you more opportunities to invest in. A 401(k) plan is more restrictive in terms of what you can invest in and the structure of your portfolio, so if you are looking for more flexibility an IRA is a great choice. This option makes a lot of sense particularly if you aren’t impressed by the investment options at your new company or if they don’t offer a good match program.
Retirement & You
Your retirement savings plan is an important step on the path to living your ideal retirement lifestyle. Contributing to employer-sponsored plans like a 401(k) is an excellent tool to help you get there. But as you know, things change and it is important to be prepared for that change when it happens.
If a new job opportunity will help you live a more fulfilling life then it is important that the hard-earned savings you have accrued will continue to work for you and support the life you deserve in retirement.
Here at Step by Step, it is our goal to help you make your money work for you, empowering you to live a life that is true to your goals, priorities, and values. Are you ready to take another look at your retirement savings strategy? Give us a call. We would love to speak with you.