Switching Jobs with Your 401(k) PlanSubmitted by CalBay Investments, Inc. on March 8th, 2017
With pensions on the decline, most modern workers need to rely on their own savings to amass enough money for retirement. One of the most powerful tools available is a tax-advantaged retirement savings program designed to encourage employees to put money away for the future, known as a 401(k) plan.
If you are lucky enough to have a 401(k) offered where you work, participating in the plan is one of the best ways to build wealth for your future. But what do you do with your 401(k) when you change jobs? Here are a few things to consider:
When switching jobs with a 401(k) you should consider your age. Older individuals must begin taking distributions from their IRA accounts starting at age 70, unless you are still working.
After switching jobs, you may be offered a Roth 401(k) option. With a Roth 401(k), you give up the initial tax savings, but you get tax-free withdrawals in retirement. If you choose to participate in a Roth 401(k), it needs to be noted to keep the accounts segregated when rolling your old balance over.
Do not cash out the 401(k) plan when you switch jobs
That money may be tempting, but cashing out your plan before age 59 ½ will subject you to severe penalties, including regular income taxes on the amount of the withdrawal and a 10% penalty. By the time you are done, you could end up losing half your 401(k) money to taxes.
Many employers allow their workers to invest part of their 401(k) balance in company stock, another reason to keep your 401(k). If your plan offers that option, and you are changing jobs, be sure to check the tax implications of the sale. If you roll the money into an IRA and cash out the stock, the entire gain will be taxed as ordinary income when you start withdrawing funds during retirement.
You have a number of choices to make when changing jobs and dealing with your 401(k). As stated above, cashing out the 401(k) is the absolute worst option. Fortunately, there are other options at your disposal. Rolling the money directly from the 401(k) to an IRA can provide greater flexibility and a host of new investment options. Most 401(k) plans offer a limited array of mutual funds to choose from. Rolling the money into an IRA allows you to invest in thousands of different stocks, bonds, mutual funds, and other investment products.
Leave Your Money At Your Old Company
You may have this option of leaving the money at your old company, but it is important to check the details carefully. The plan administrator may charge higher fees for ex-employees, so you could end up losing a lot of money. Always check with your HR department about the logistics of leaving your 401(k) in place and any costs involved.
Carrying Your Plan With You
Shifting the money in your 401(k) to your new employer is another option, although not all companies allow this. Check with the HR department at your new company to see if they allow such transfers and how you can initiate the paperwork. If you are allowed to move your 401(k), doing so could simplify your life. Moving your old 401(k) to the new employer means one plan to manage and one administrator to deal with.
No matter which option you choose, it is a good idea to seek additional information and investment advice. For more information, visit CalBay. They can help guide you through the entire process, from deciding on the best option for your existing 401(k) balance to evaluating your past performance and current asset allocation.