Understanding Your Retirement Plan Options When You Leave a Job
When planning for retirement, one of the hardest parts is knowing where to start. If your previous employer offered a 401(k) plan you took advantage of, then 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 hefty penalties generally occur when you withdraw money from your 401(k) account before age 59 1/2, leaving you with the following:
- A 10% early withdrawal fee, and
- income tax to the distribution
So how do you continue to use your 401(k) to your benefit after you leave your job? You have a few options to consider (if permitted):
- Which are to roll over the funds to a new employer’s plan (if available and if rollovers are permitted)
- You can roll them over into an investment firm’s Individual Retirement Account.
Below are a few key points to consider:
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 plans 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.
You may want to compare plan fees and investment options before you make this decision. Check the plan’s annual report and individual fund documents to compare fees. You can usually check what investment options are available online through the 401(k) provider’s website.
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 investment options you are looking for, which may give you access to advice. While many Employer plans offer some resources to participants, this is generally not a strong suit. You may appreciate the greater support for investment decisions and holistic wealth management that individual retirement accounts often make available.
There are other factors based on your own 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 circumstances (including your financial needs, goals, and objectives). Some of the factors you should consider when making a rollover decision include (among other things) the following:
- Investment options
- Fees and expenses
- Penalty-free withdrawals
- Creditor protection in bankruptcy and from legal judgments
- Required Minimum Distributions or “RMDs”
- The tax treatment of employer stock if you hold such in your current plan
The decision of which option to select is complicated and must consider your total financial picture. It would help if you also discussed your 401(k) options with your legal or tax advisor to reach an informed decision.
Rolling over your 401(k) into an IRA or your new company plan may take some administrative work, but it isn’t challenging.