Did you know that Americans change jobs every 4.2 years on average?1 In many cases, this means accepting a promotion or a new role within your existing company. But if you’re changing employers, don’t forget about your 401(k). Old retirement accounts are often forgotten after making a career change. If you’ve recently accepted a new job and want to maximize your retirement savings, here are a few options to consider.
1. Keep your 401(k) from your previous employer.
Depending on your investment options, you may want to keep your retirement account active. This is certainly an option, but we recommend checking in frequently to make sure things are still on track. Check to ensure that you won’t be subject to costly maintenance fees over time that could inhibit your account growth.
If you’re leaving a job after a short time, you may be wondering what to do with a small 401(k). Your previous employer may require you to transfer your money if you’ve accrued less than $5,000.2 If you’ve saved $1,000 or less, you’re likely to receive a check for that amount. Remember to transfer that money into a new 401(k) or another retirement option, like an IRA, to avoid owing taxes or paying withdrawal penalties.
2. Transfer your money to a 401(k) with your new employer.
This option may help you to keep a closer watch over your retirement funds, and your new job may offer lower fees or a higher percentage match. Talk to your investment advisor to compare options before making the change, but it could be an advantageous decision.
There are pros and cons to rolling over your 401k to a new employer. In the pro column: a direct rollover allows you to transfer your money simply without taxes or penalties. On the other hand, 401(k) transfer rules can be complex, and if you don’t follow them, you could be hit with a 20% withholding fee or a 10% early withdrawal penalty.3 This is why we always recommend seeking professional advice as you make the transition.
3. Roll over your 401(k) into an IRA.
Individual retirement accounts often offer a wider range of investment opportunities, so a career transition may be the perfect time to consider a new retirement savings option. There are many differences between 401(k)s and IRAs, from investment options to contribution limits, so you should compare and contrast before making a decision. We believe that both options offer great benefits, but one option may be more advantageous than the other for your specific retirement plan.
You can roll over your 401(k) into a traditional IRA without paying taxes now – though they will be due when you withdraw funds later. You can also choose a Roth IRA, which will entail paying taxes on your 401(k) withdrawal now, but allows your investment to be withdrawn tax-free later on.
4. Cash out the account.
This is one we strongly caution against. Not only do you lose out on any potential tax-deferred growth, cashing out the account is a taxable event. Not only will you have to pay taxes on any growth, if you are younger than age 59 1/2, you will also be hit with a 10% penalty.
If you’ve recently changed employers and want to create a smart savings plan, a SageSpring advisor can help you evaluate your options. We follow a holistic approach to financial advising, helping you choose the best option for your future. Contact us today to build a long-term financial strategy that will set you up for a successful retirement.
The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of SageSpring Wealth Partners and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice.
