Changing jobs can carry a mix of emotions depending on the reason for the career change. Regardless of the reason for the job change, one thing everyone needs to know is what their options are with their 401k account from a previous employer.
The U.S. Bureau of Labor Statistics estimates that Americans will hold over 12 jobs over the course of their career. While younger workers are more likely to move around, the average job in the U.S. is held just over 4 years. Compensation and advancement are often the largest driving factors that leads people to make job changes. As people move from one phase of life to the next, sometimes they underestimate the importance of taking their retirement savings with them. While it may seem insignificant, making a conscious decision about your retirement nest egg can help you to keep moving forward financially.
After you leave your job, you have four options for your old 401k account.
Option 1: Leave your 401K where it is
In most cases, you can leave your 401k in the former employer’s plan. This option requires the least amount of work since there is no additional paperwork needed. Also, your account is still able to grow tax-deferred until you withdraw funds.
While this option might be an easier option it may not be the most advantageous. One of the limits of a 401k plan is that there can be fewer investment options. Also, 401k maintenance fees may be passed on to you, which can increase the expenses of the 401k plan. Another restriction is that you cannot contribute to a 401k once you no longer work for that employer. Finally, it can be complicated to keep track of where you have funds if you have multiple 401k with past employers.
Option 2: Roll it over your 401K to your new employer
If your new employer has a 401k and the plan allows rollovers, consolidating your 401k from your previous employer with your new employer may make it easier to keep track of where your funds are located. Earnings will accrue tax-deferred until you withdraw funds. Some 401k plans allow loans, by rolling over your previous 401k to the new one you may be able to borrow against that balance in the future.
The are some potential downfalls of rolling over your 401k to a new employer. Most 401K plans have limited investment options. Those investment options can be replaced by the plan trustee without your approval. In addition, record keeping and administrative fees of the plan may be passed on to you.
Option 3: Cash out your 401k
Cashing out your 401k is another option for an old 401k. While this option allows you to gain access to your funds, it usually carries a penalty if you don’t meet certain qualifications. If you withdraw the money from your 401k and do not meet the required qualifications for a withdrawal (such as age, typically 59.5, financial situation, or disability) you will be required to pay a penalty for the early withdrawal. In addition to the early withdrawal penalty, income tax may also need to be paid on the withdrawal.
Option 4: Rollover your 401k to an Individual Retirement Account (IRA)
Rolling your 401k to an IRA allows for the most flexibility with your investment choices. This can give you access to mutual funds, exchange traded funds, stocks and bonds, to name a few. You may also have greater flexibility with investments that provide income, such as dividends and interest. IRAs can provide for greater flexibility with withdrawals and various tax withholding. IRAs continue to allow for tax deferred saving.
There are some possible disadvantages to using an IRA. You are not allowed to take a loan against an IRA. Depending on your investment choices there could be upfront commissions, high annual fees or even back-end charges limiting you from withdrawing money from the IRA within a certain period of time.
It is important to remember everyone’s situation is different. When deciding what is the best option for you, it is wise to research all options and understand the fees involved with those options. These decisions are difficult, and you may want to reach out to a financial professional to assess your situation. In doing so, we suggest you work with a fiduciary, an advisor that works in your best interest.
Shay joined Advisors Management Group in June of 2020. Shay works as a Trading Specialist for AMG. He works alongside the advisors to trade client portfolios. He helps to provide continuous improvement within the trading department, to ensure we meet our client’s needs.
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