One of the trickiest part of planning for retirement is keeping track of retirement accounts as your career evolves. With folks changing jobs now more than ever, it can be especially daunting to know whether you're on track for retirement. First thing is first: if your previous employer offered a 401(k) or other employer-sponsored retirement plan you took advantage of, you are already off to a great start!
When changing jobs, it's easy to continue investing in those tax-deferred savings, as long as you don't simply cash out. With the great benefits of tax-deferred growth on pre-tax earnings, you want to avoid the penalties incurred with early withdrawal as much as possible. These penalties generally occur when you withdraw money from your 401(k) account before age 59 1/2, leaving you with:
- A 10% early withdrawal fee, and
- income tax on the distribution
So how do you continue to use your 401(k) to your benefit after you leave your job?
Here are a couple of options:
- Roll over the funds to a new employer's plan (if available and permitted)
- Roll over the funds into an Individual Retirement Account (IRA)
First, consider these key points:
- Rolling over assets into a new 401(k): If your new employer offers a high-quality 401(k) plan that matches part of your contributions, you may want to consider rolling over the assets from your old plan into your new one. Rolling over into a new 401(k) helps you avoid retirement plan sprawl. If you don't consolidate programs at each job, you may end up with a half dozen separate retirement accounts in your career, making it hard to tell if your savings are on track.
- Plan fees: You will want to compare plan fees and investment options before you make this decision. To compare costs, check the plan's annual report and individual fund documents. You can usually check what investment options are available online through the 401(k) provider's website.
- Opening an IRA: If you aren't moving to a new job with an appealing 401(k) plan, you may want to consider opening an individual retirement account (IRA) and rolling your 401(k) savings into that. You can choose a firm that offers the kind of investment options you are looking for, and that may give you access to advice. Most investment companies offer greater support for investment decisions and holistic wealth management that individual retirement accounts often make available.
- Other factors: Other factors are based on your facts and circumstances that you may want to consider before making this decision. Each option offers advantages and disadvantages, depending on your particular facts and events (including your financial needs and specific goals and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the differences in:
- Investment options
- Fees and expenses
- Creditor protection in bankruptcy and from legal judgments
- The tax treatment of employer stock if you hold such in your current plan
- Required Minimum Distributions or "RMDs"
- Penalty-free withdrawals
Making the right decision is complicated and should align with your financial plan. It's always best to discuss your options with your legal or tax advisor. If you have questions about what to do with your previous employer's retirement plan and/or new employee benefits, such as an employer-sponsored retirement plan, contact our office to discuss your options.