If you have a goal to quit your job in the upcoming year, that’s great! You’re all set to make a fresh start in your career. But what will you do with your old 401(k) account?
You need to make a smart decision. By all accounts, you have four options.
1. Withdraw all the money from your account
2. Leave the account with your soon-to-be ex-employer
3. Roll over your account into an IRA
4. Roll over whatever you have saved to your new employer’s retirement plan
Each of these options will have a significant impact on your long-term financial goals. We’ve broken down the repercussions of your possible decisions, and we hope you’ll find the guidance you need to make the best choice with your 401(k) account in your new job transition.
Which one costs the most?
Choosing to withdraw all the money from your account, or “cashing out”, is the costliest choice. It also involves a lot of high-risk factors that you should be aware of.
First of all, this is the costliest option since you’ll have to pay income taxes on the full amount withdrawn from your 401(k) account balance. So, it would be incorrect to lovingly gaze upon your account total and believe that the number you see will be what you receive after the collection of taxes. Be aware, that depending on where you live, you may have to pay income taxes on your total amount not only at the federal level but also possibly at the state level.
Additionally, If you are younger than age 59 ½, you will be subject to an additional 10% early withdrawal tax penalty by the IRS. You can count on a significant cut of the money you have in your current 401(k) account to disappear, once you’ve completed the entire process of cashing out.
But the biggest disadvantage of this option is that you’re robbing yourself of future retirement savings. Since the money you’re taking out will no longer earn compound interest, you’re no longer growing this amount of money.
What if you leave the plan with your ex-employer?
Leaving your plan with your ex-employer is an option, however, it’s not one that we would advise. You can’t make new contributions to this account in the future, and you also won’t be able to borrow money from this account. Ultimately, it backs you into a corner of having a stagnant account, without any significant growth from continued contributions.
You should also be aware of the fees of your current retirement plan. These fees may include record keeping or plan administration. While they’re probably nominal, even though you are no longer with the company, you will continue to pay them.
Finally, you may face a situation in which the plan sponsor will force you to withdraw funds from the account if you have less than $1,000 in the plan. If you have between $1,000 and $5,000 the plan sponsor can force you to move the funds to an IRA.
There is little benefit to leaving your account with your ex-employer, and you may face more disadvantages if you choose to leave it where it is. It’s best to avoid this option, if at all possible, but it’s still better than withdrawing the funds altogether.
What if you rollover your savings into an IRA?
If you elect to roll over your savings into an IRA you will have three options. These options include:
1. Rolling over your assets from a traditional 401(k) account to a traditional IRA
2. Rolling over your assets from a Roth 401(k) to a Roth IRA
3. Rolling over your assets from a traditional 401(k) to an IRA and convert it to a Roth IRA
Below we will outline each of these choices, and the impact they will have on you and your account.
Roll over your assets from a traditional 401(k) account to a traditional IRA
In order to roll over your assets from a traditional 401(k) to a traditional IRA, you will need to complete a multi-step process. First, you will need to open up an IRA to receive the funds. Next you’ll need to complete the 401(k) rollover process or forms prescribed by the 401(k) plan. Once you’ve done this the funds will either transfer electronically to your new IRA or a check will be issued that will need to be deposited directly into the IRA. Overall, it’s a simple process to from start to finish.
Roll over your assets from a Roth 401(k) to a Roth IRA
A great facet about this option is that you can complete the transaction with any custodian of your choice. This means you can do a direct rollover to your new company’s custodian, via an electronic transfer or by check.
Like rolling over from a traditional 401(k) to a traditional IRA, you’ll have to complete specific paperwork, you won’t have to pay taxes, and your new earning is tax-deferred.
Unlike the previous option, you can qualify for a tax-free withdrawal once the account is five years old and you’re 59 ½ years of age (or older).
Roll over your assets from a traditional 401(k) to an IRA and convert it to a Roth IRA
Is your head swimming? We hope not. We know we’re throwing a lot at you but stick with us! It will be worth it in the end.
One very important fact about this choice is that you will need to pay taxes on the amount you convert into the Roth IRA, however there will not be any penalties to do this. In the two previous examples described above this was not the case. But once the funds are converted into your Roth IRA, they will grow tax deferred and qualified distributions after age 59 ½ years of age will be completely tax free!
What if you roll over your assets into your new employer’s plan?
It is a good decision to roll over your assets into one 401(k) account since you can track everything. But there are a few details you need to check before making the final decision, and connecting with a seasoned financial advisor may be the ticket to understanding the full picture.
Make sure you ask all of the following questions, to gain a comprehensive understanding of the step by step process. The most important questions to know the answers to are:
1. How much do you need to pay in fees?
2. How many investment options will you get?
3. Are you getting your preferred investment options?
4. How long will it take to move your assets?
Understanding the answers to these questions, and evaluating if the scenario is right for you will determine your best way forward, among all of your transition options.
Steps to take before rolling over your assets
If you are preparing for a career transition, you’re experiencing all the emotions that come along with this transition at hand. However, don’t forget to complete these important steps with your past and new employers, so you can assure your assets are firmly protected.
Make sure to arrange to discuss your options with your new plan administrator. They will have experience assisting with these sorts of transitions and may be able to offer you insight that will help you determine the types of investments you should make with your new company.
Before separating from your former position, assure that you’ve completed all the necessary paperwork for your rollover. Then check again. You may be dealing with a significant amount of money and it is worth your time and effort to assure that everything processes according to plan.
Finally, request your previous plan administrator’s assistance with rolling over funds to your new IRA or retirement plan. They have experience with these types of requests and their role is to assist in these circumstances. Don’t allow pride or any hurt feelings impact your ability to ask for help, especially, in the face of a transition of this magnitude.
Moving to a new position with a new company can be an exciting and stressful time. Transition is hard enough as it is, without adding financial complications. Allow yourself adequate time to think carefully and do your homework before making the final decision on how you want to handle your 401(k).
Your decisions now will affect the golden years and the lifestyle you plan to lead. If you have any doubts, have a talk with a financial planner before choosing any option.