America’s getting back to work after the disruption of the pandemic and today’s job market is HOT! Around our office we have lots of clients changing jobs, so we’re spending our days helping them decide what to do with their retirement savings.
Have you accepted a new job and are wondering what to do with your 401(k)? Maybe you’ve worked at the same company for a long time and have built up the bulk of your retirement savings into this plan. No idea what to do? Whether it’s your first time or fifth time deciding what to do with your 401(k), it can feel overwhelming. But don’t worry--I’m here to help!
When you leave an employer you typically have a short list of options, including the following.
Option #1: Roll the retirement savings account over to an IRA or Roth IRA (or both).
By taking advantage of this option you’ll be able to move the funds to the institution of your choice, giving you plenty of investment options and fee structures. This gives you total control of your money and is a non-taxable event if done properly.
Option #2: Cash it out.
This is usually a terrible option that I don’t recommend, though it's worth being aware of. Cashing out gives you access to all of the money now, but results in additional taxable income in the year of distribution and a 10% IRS penalty if you’re under the age of 59.5. Typically the penalties and taxes will dwindle down the account pretty dramatically.
Option #3: Leave it with the “old” employer.
This can be a cheap and easy option. But before you leave the funds at your employer, you’ll want to refer to the Summary Plan Description (SPD) to read the fine print. The SPD will confirm whether you can leave it there and will let you know if anything changes with your account now that you’re terminated. Some employers charge higher fees to terminated employees, so it’s important to confirm these details as you leave the company.
Option #4. Roll it over to your new 401(k).
This can be a great low-cost option to consolidate your accounts. You’ll be limited to the new employer’s investment options and fees, so be sure to refer to their SPD for more info on what to expect. This is a non-taxable event if done properly.
Our Recommendation: What to Do With Your Retirement Savings
In most cases, the option to roll your account over into an IRA will make the most sense because it allows you to align your retirement account with your retirement goal. One of the biggest mistakes that I see is that many people walk away from their old employer and stop managing their “old” 401(k). In some cases, years pass by before they look at the account again and by then their investments are out of line with what’s appropriate. Don’t leave the plan or roll it over and forget about it. Things will change in your life and in the markets, so it’s important to take a proactive approach with these hard-earned dollars that you’ve spent time accruing!
Regardless of which option you choose, you’ll want to make sure that the account and the asset allocation strategy are in line with your retirement goal. Over time you should reevaluate these funds and continue to manage them in a manner that’s in line with your goal.
I love trying to help clients make their job transitions smoother, so if you need help with your 401(k) and your financial plan then head over to www.merinowealth.com/getstarted/ to see if we can help.