You are ready for a new adventure, Congratulations! Leaving an old job can be a freeing experience because it opens you up to another chapter of your journey. It can also be incredibly unsettling, leaving you to find a new routine, balance, and structure.
Leaving a job comes with many difficult steps: packing, moving, budgeting, as well as parting with friends and colleagues. In the hustle and bustle, many people forget to make a plan for their 401(k). Oops, you forgot about that too? Don’t worry, according to a study conducted by Cerulli Associates, 25% of people over 45 did not know what to do with their 401(k) savings when they left their job.
I’m here to help outline potential options for you to maximize your retirement savings during the move and keep your money safe.
1. Move funds to new employer 401(k) or 403(b)
If you are moving to a company that offers another 401(k) retirement option, you can simply transfer the funds from your old account to your new one. During the onboarding process, you should be given specific instructions on how to seamlessly transfer the accounts. One good perk about this option is that there are no tax consequences or penalties for the move.
As long as you like the investment options of your new employer’s 401(k) plan, transferring the funds is the smoothest and most tax-friendly option. Taking advantage of the new company match is another great way to maximize your saving potential. By rolling over the funds you are also starting a fresh account with a healthy balance which will only increase your savings momentum.
When you are moving your funds take a look at the investment opportunities provided by the new company and any fees associated with the account. The fees should be quite low, about .2%. If you see that the plan meets or exceeds a 1% distribution fee you should consider some alternative options. These fees are especially important when you are nearing retirement and withdrawing money from the account.
2. Keep the funds in your previous employer’s 401(k) account
This advice may seem strange at first, but hear me out. In some instances, companies will allow former employees to continue contributing and managing their 401(k) accounts even after they have left the company. For obvious reasons, many people do not choose this option. It could be worth staying for a couple of reasons:
- There are little to no investment fees (including administrative costs).
- The company offers diverse investment options.
Most employers only consider this option if the account balance exceeds $5,000 and leaving the funds in an old work account can lead to a mismatched investment portfolio in the future.
3. Roll the funds into a Traditional or Roth IRA
If keeping your funds in either a new or pre-existing 401(k) is not an option, you could move your retirement savings into an IRA. To avoid tax penalties during this move, opt for a direct rollover. This move will open up many different investment options.
Investment opportunities to consider:
- Certificates of Deposit (CDs)
- Mutual funds
- Real estate
In terms of payout options, it is good to look at the different benefits that both a 401(k) an IRA have to offer. Since these plans are designed to enhance your retirement savings, it is good to think about the payout stipulations of each.
- Compare administrative fees for each plan to see which offers the best/lowest rate.
- Look at each payout option the plans offer.
- Evaluate investment options available in the plans.
Many people are drawn to the IRA due to the flexibility of the plan, low fees, and robust investment options. Keep in mind that you won’t be making the same type of regular contributions to an IRA as you would with a 401(k), which could slow down your momentum. Take a close look at the fine print of each plan to decide which option will give you the best return.
4. Elect for a lump-sum payout
This is the most unpopular and unadvisable choice for your 401(k) account due to the tax penalties that accompany it. With a lump-sum, you are hit with a 20% tax cut and if younger than 59 ½ you will pay an additional 10% fee, leaving a huge hole in your savings.
Be sure to look at the amount of money that you have saved in your account to help determine the best course of action for moving it. If your account has less than $1,000 and you do not move it, the company will automatically give you a lump-sum payout which will impact your savings. The good news is if you do receive an accidental lump-sum payout and you are within the 60-day mark, you can still roll the money over into a new employer’s plan or into an IRA without any fees.
The bottom line is that you have a lot of options for your 401(k) funds when you leave an old job. With some time and research, you will be able to make the best decision for your retirement savings.