Are you about to start a new job? Not exactly sure what to do with that old 401(k) leaving your job? While decorating your office and celebrating your new found position with coworkers, some significant future planning should be top of mind.
Fortunately, you have several options available to consider. Let’s dig a bit deeper on how to pick the right strategy to support your financial well-being.
What does an excellent 401(k) plan look like? If you’re not sure, you’re not alone. Most people do not have a clear understanding of how their retirement plans work!
That said, substantial 401(k) plans usually have the following benefits:
- a variety of investment options that include low-cost index funds
- an employer match (can you say “free money!”)
- minimal plan expenses (or expenses that are covered by the employer)
- short or nonexistent vesting periods
- easy-to-read plan instructions and administrator advice available
Unfortunately, most people don’t know how to take full advantage of their 401(k). At the very least, if your company offers a match, aim to contribute at least up to the match to take advantage of free money from your employer.
Consider upping your contribution if you receive a raise. Remember that your 401(k) contributions can also help to lower your taxable income.
What Should You Do With An Old 401(k)?
Even though it’s your money, knowing what to do with your 401(k) after leaving your job isn’t always straightforward. Let’s review some of the options that are available to you.
Pay Off Your 401(k) Loan
If you borrowed money against your 401(k), you are responsible for paying it back in full upon leaving your job. This applies even if you have been laid off or terminated from your position.
If you do not repay it, the loan amount will count against you as income. This extra income will affect your tax payment for the next year. Moreover, you will be liable for paying an additional 10% penalty of the sum you borrowed if you are under age 59 1/2.
Sometimes, in the event of company layoffs, employers help with repayment strategies. It never hurts to ask your former HR rep what options you have available to you.
Do Nothing And Keep The Money As Is
Most companies will allow their former employees to stay invested in their 401(k) plan even after moving on. To be eligible, you may need to have at least a $5,000 balance in your account. Often times, many employees follow this strategy because it’s the simplest one.
Though this may sound simple, this strategy can also become complicated down the road. Let’s say you switch jobs five times in the next decade. Do you want to track five different retirement accounts?
Keeping your money put is only advantageous if your employer’s 401(k) has fantastic investment options and low fees. The plan you are in must disclose all fees and costs. This disclosure makes it simple to review plan costs in order to make an informed decision on what to do.
If you decide to leave the money alone, make sure that you check in on the 401(k) periodically and note any changes. If, for example, your former company goes bankrupt, you may find yourself facing a paperwork disaster.
Roll your 401(k) Into A New 401(k)
If you are starting a new job that offers a 401(k) plan, you can usually roll over your old plan to consolidate it with a new one. This strategy doesn’t have any tax implications, and it can simplify your retirement account tracking.
That said, rolling over your old 401(k) to the new one is only beneficial if the new 401(k) plan has better investment options than your previous one did. Not entirely sure? If your new job is with a larger organization, we recommend checking with the Human Resources Department to see if there is someone that can assist you with moving your old plan into your new one.
Roll Your 401(k) Into An IRA
Many people opt to do a rollover IRA upon leaving their job. This strategy has numerous advantages. For one, it’s tax-deferred. And, rather than being constrained by what the employer plan offers, you typically will have multiple investment options available to you.
If you have a traditional 401(k), you will be rolling into a traditional IRA. Likewise, if you have a Roth 401(k), you will be rolling those funds into a Roth IRA.
While this may seem complicated, it isn’t. A brokerage firm or Financial Planner can assist you in transferring your funds.
Withdraw From Your 401(k)
The funds in your 401(k) are yours. Thus, you do have the option to withdraw your money if you so choose. However, you should think carefully before choosing this option, as it does come with some considerable downsides.
First, if you take out any cash before reaching age 59 1/2, you will be liable for federal income tax and any applicable state and local taxes. Secondly, you will be hit with a 10% early penalty fee for withdrawal.
These fees can end up costing you tens of thousands of dollars, and it can hurt your retirement saving strategy substantially. Remember that your money is working hard for you when it is set aside in a 401(k) or IRA. We typically recommend that you avoid cashing out your 401(k) unless it’s absolutely necessary.
Final Thoughts On Managing Your 401(k) After Leaving Your Job
When starting a new position, it’s highly likely that you are more concerned about your performance and finding your new groove than you are with fussing over your 401(k) after leaving your job. However, no matter what age you are, it is important to ensure that your retirement funds are always working in your best interest.
Are you in the middle of a career transition and could use some guidance on how best to move forward? Do you want make sure that your financial choices are the best ones for you and your family?
We can help! Contact us today to learn more about our financial coaching and holistic planning services.