YOU HAVEN’T ROLLOVER YOUR OLD 401(K) YET!
Nearly two-thirds of American workers are on the hunt these days and bouncing from job to job at an alarming rate. With the rising popularity of 401(k) plans in place of traditional pension plans, many workers have gathered up quite a collection of 401(k) accounts as they move from job to job.
Many people aren’t sure what to do with their 401(k) plans when they leave a company or what they are even allowed to do. When it comes to company-sponsored 401(k) retirement plans, there are four different options available to you when you leave an employer:
1. Leave the plan with your previous employer
This is the easiest option because it doesn’t require you to actually do anything. However, there are some downsides to leaving your money behind when you move on, though. You won’t be able to contribute to your plan anymore or take a loan from it. You are limited to the investment options the company offers, which may have higher fees or lower returns than you can find elsewhere. You are also limited in your withdrawal options.
2. Move your 401(k) money into your new employer’s plan
Not all employers accept rollovers from other plans, so you will have to consult your new plan administrator to see if this is even an option for you. People can choose this approach as a way to consolidate assets into one account instead of having multiple small retirement accounts lying around.
Most of the advantages of moving your money into your new employer’s plan are the same as for keeping it in the old one, such as creditor protection, possible lower-cost and investment options.You are able to take a loan against your account, though it is important to remember that it is due in full when you leave that job. The disadvantages to this approach are also the same as the previous option.
3. Cash out the account
More than 25% of unemployed or underemployed workers chose this route according to a recent report by a Transamerica Center for Retirement Studies. It is almost never a good idea. Withdrawing the funds from your 401(k) account before you are 59 ½ obligates you to pay ordinary income taxes on it and a 10% early withdrawal penalty.
For example, someone in the 25% federal income tax bracket paying 5% state income taxes, a $50,000 cash out would cost them $20,000 in penalties and taxes. Who wants to take home only a $30,000 check after busting your butt all those years.
4. Rollover your 401k into an IRA
When considering what to do with their old 401(k) accounts, most people make this choice and roll their old 401(k) plan(s) over into an IRA account. Great choice!
There are many advantages to having your money in an IRA as opposed to a 401(k) plan. You have much more flexibility with the IRA. You can invest your IRA in just about anything: stocks, bonds, mutual funds, ETFs, crypto, etc. instead of being tied to the 20 or so options your company offers. Also, IRAs usually offer much greater flexibility as to who you can name as a beneficiary or contingent beneficiary of the account.
It is a good idea to consult with an experienced financial professional when making changes to your retirement savings plan. A qualified professional can help you understand your options and how they relate to your specific situation, as well as walk you step-by-step through the process.