Have you changed jobs recently or plan to in the future? Are you are venturing into a new career path? Was your company acquired by a larger firm?
Many employees are filled with excitement which often leads them to forget about their 401(k)s. Oops.
However, forgetting about your 401(k) could end up costing you. Leaving money behind or even forgetting about it can substantially harm your future financial well-being.
So what happens to those funds when you leave the company?
Here are your 4 options:
1) Leave it with your previous employer.
2) Move it to your new employer’s plan.
3) Roll it over into an IRA account.
4) Cash it out.
1) Keep your retirement savings with your former employer
If you like the investments in your 401(k), you may want to simply leave it with your old employer. In the short-term, this may be the best and easiest solution. Since this option doesn’t require any immediate action, you can give yourself some time to explore your other options.
You will still want to consider your fees and the investment options that are offered. Some 401(k) plans have low management fees and have a wide variety of investment options, while others may have high fees and come with limited investment options. For example, if your vested account balance is $5,000 or less, some providers will require you to move the money elsewhere. And, your all-in fees might be expensive—in which case you could probably find a lower-fee option. Depending on how your plan is set up, you may want to explore your new employer’s 401(k) plan and determine if it makes sense for your time horizon and investment objectives.
Last, if you’re like the average millennial, you’ll likely change jobs several times throughout your career. Having multiple 401(k) accounts with multiple companies may be difficult to keep track of.
2) Move it to your new employer’s plan.
The fewer accounts you must manage, the easier it will be to manage your wealth. Therefore, you may want to consider moving your old 401(k) to your new employer’s 401(k). Before you do so, check with your new employer to determine if this is an option. Some plans don’t allow you to transfer your old 401(k) funds into your new account.
As stated above, make sure you review the fees and investment options before you do this. If your new 401(k) has high fees and limited investment options, you may want to explore other options such as opening an IRA account with a fiduciary, fee-only investment management firm.
3) Roll it over into an IRA account.
A popular option is to move your 401(k) funds to a traditional IRA where it would continue to be tax-deferred. Additionally, you can roll over multiple 401(k) accounts into a single IRA, which can make accounting and recordkeeping much easier.
You may also roll over your old 401(k) to a Roth IRA, if you have Roth 401(k) funds. You can also “convert” traditional 401(k) funds to Roth. But, while earnings would grow tax-deferred and could eventually become tax-free, any pre-tax amount would be taxable in the year you take the distribution from your 401(k) account. This could decrease the actual amount you would be able put into the Roth IRA.
With an IRA, you may have access to broader investment choices (instead of those dictated by your former employer’s plan. Also, if you’re under 59 ½ you can avoid the 10% early distribution penalty for pre-59 ½ distribution on withdrawals for certain reasons, including, a first-time home purchase up to (up to $10,000).
However, there may be some additional requirements when withdrawing funds. For example, if you have a traditional IRA, after age 70 ½, you’re required to take annual required minimum distributions, even if you’re not yet retired.
4) Cash it out.
Taking the cash out of your account should be your Last Resort. While this may seem like the perfect way to get some quick cash, it could substantially harm your future retirement savings.
However, the distribution would be subject to a mandatory 20% federal income tax withholding on any taxable amount. Also, the distribution is subject to a 10% IRS early distribution penalty if you are under 59 ½ and do not qualify for an exception. Not to mention, you could be missing out on tax-deferred growth of your retirement assets.
Deciding what to do with your retirement savings from a former employer can seem daunting, but it’s worth exploring the options. Management and portfolio fees can have a big impact on your savings—especially over the course of decades—so it’s important to research and find the best solution for you.
If you’re looking for a retirement planning partner who can help you realize your financial goals, we have retirement planning advisors who are here for you. Our firm focuses on helping retirees and those preparing for retirement achieve financial freedom by creating a plan that shows them how they can have the income they need and want until they turn 100.
If you’re ready to take the first step to achieving your retirement goals, our team is ready to assist you.
Schedule a brief call with us here.
