Changing jobs can be stressful. You have old projects to finish and new responsibilities to learn. But when you pack up your personal belongings and move to your next place of employment, don't forget about your retirement account.
The money you've put in is yours to keep, but you may not know what to do with it. We're here to help you understand your options and continue preparing for your future.
Leave 401k funds with your previous employer
The easiest thing to do may be to leave your assets in your previous employer's retirement plan, but there are some details you'll want to consider before choosing this option.
Generally, you're only able to leave your money in your previous employer's plan if your account balance is over $5,000. If you have $5,000 or less, you may be required to take a full distribution. This can be in the form of a rollover. If you take the distribution in cash, you may be subject to tax and penalties.
Also, if you leave your money in your former employer's plan, you'll be limited to that plan's investment choices and payout options, which may be more limited than if you rolled the money over into an IRA. Plus, you'll no longer be able to make contributions or take a loan, in most cases. And you may have to pay extra service or administrative fees, along with the possibility of having transaction limits imposed.
If you decide to leave your retirement savings with a previous employer, be sure to keep your contact information up-to-date so you'll continue to receive statements and other pertinent information.
Roll over to new employer’s retirement plan
You may be able to move your assets from your former employer's plan directly into your new employer's plan. This direct rollover allows your money to remain invested in a tax-deferred plan, and you incur no taxes or penalties for the move.
Before you make this decision, you'll want to review the investment choices and flexibility in your new plan. Options and withdrawals may be more limited than your previous plan. In addition, you may have to wait a year or more to be eligible to participate.
Roll over to an IRA
Employer plans are designed to meet the needs of many people, not just yours. But fortunately, you don't have to be tied to a former employer's plan.
You can rollover your funds directly from your previous employer's 401k into an IRA. By completing a direct rollover, you can avoid the mandatory 20% federal income tax withholding.
A rollover to an IRA may be a good idea for you if you want to have more control over your retirement assets. Additionally, this option can simplify your retirement planning by having all your investments with one financial provider. There are two types of IRA’s that you can rollover to: Traditional and Roth IRA.
You can rollover your funds directly from your previous employer's 401k into a Traditional IRA. By completing a direct rollover, you can avoid the mandatory 20% federal income tax withholding.
If you roll money into a Roth IRA from a Traditional 401k, you'll be taxed on the money going into the account, but pay no federal income taxes when you withdraw the money (after you're age 59 1/2 and have had the account open for five or more years). Money from a Roth 401k can be rolled into a Roth IRA tax-free.
Cash out of your old 401k plan
You don't have to wait until you retire to access the money in your retirement plan. It's yours, and cashing out will provide you with a lump-sum cash distribution in the form of a check payable directly to you. But there are several reasons this may not be the best option for you.
If you cash out of your old plan, you will deplete your retirement savings account and will need to start over again. Also, you won't receive the balance of your account. Your employer will be required to withhold 20% for federal income tax purposes. If you are in a higher tax bracket, you may owe more tax. You may also have to pay a 10% tax penalty for making a withdrawal from a 401k before age 59 1/2. If you leave your company at age 55 or older, the 10% penalty may not apply.
It is highly recommended that you consult with your tax adviser before cashing out your retirement plan.
Keep an eye on the future
Remember, saving and planning are key to a comfortable retirement. Whatever you choose to do with your 401k when you change jobs, our agents are here to help you ensure your decisions are in line with your retirement goals.