Navigating Transition: Managing Your 401k
Transitioning between jobs or bidding farewell to a long-held position can stir up a whirlwind of emotions. Anticipation for new beginnings mixes with apprehension about the unknown. Similarly, retirement marks the end of an era, prompting reflection on the journey thus far.
Don't forget about your retirement savings in your old job's 401(k) or 403(b) plans during these changes. Your retirement savings are important. Make sure to keep track of them. The decisions you make regarding these funds hold considerable weight in shaping your financial future.
Given the substantial role your 401(k) plays in your retirement strategy, it's prudent to carefully evaluate your options, considering the advantages and drawbacks of each.
Here, we present four avenues for consideration as you navigate this pivotal juncture.
Keep your 401(k) in your former employer's plan
Many companies provide the option to maintain your retirement funds within their plans post-departure.
Advantages:
Continued potential for tax-advantaged growth of your funds.
Possibility of penalty-free withdrawals if leaving your former job at age 55 or above.
Access to institutionally priced or distinctive investment opportunities.
Federal law offers extensive protection against creditors.
Considerations:
If your account balance is less than $7000, you have a few options. It could be given to you as taxable income. It could also be rolled over to an IRA. Another option is to transfer it to your new 401(k).
If you decide to keep your money in your old employer's 401(k) plan, you usually can't add more contributions. Also, you might not be able to take out a loan from your 401(k).
Withdrawal options may be restricted; partial withdrawals might not be allowed, necessitating full balance withdrawal.
You must start taking out a certain amount of money from your retirement account every year once you turn 73. If you were born in 1960 or later, you have to start taking out money at age 75.
Assess the potential impact of net unrealized appreciation (NUA) if holding appreciated company stock in your workplace savings account. Choosing between staying in the plan, receiving the stock directly, or rolling over the stock to an IRA requires careful consideration, as rolling over to an IRA will forfeit any NUA benefits.
Transfer funds into an IRA
A Rollover IRA facilitates the transfer of funds from your former employer-sponsored retirement plan into an IRA.
Opening the IRA requires selecting a financial institution. Be diligent in researching fees and expenses associated with different IRA providers, as they can vary significantly.
Advantages:
Pre-tax funds could grow tax-deferred.
If you are under the age of 59½, you have the option to withdraw money penalty-free. This can be done to purchase your first home or cover college expenses.
A broader array of investment options may be accessible compared to an employer's plan.
Assets can be rolled over by source type, allowing independent transfer of Roth assets to a Roth IRA.
Considerations:
Investments within an IRA might incur higher expenses compared to a 401(k).
If you were born in 1960 or later, you need to withdraw money from your traditional IRA every year. This rule applies even if you are still working. The withdrawals begin after you turn 73.
Federal law gives extra protection to money in 401(k) plans. Some states also protect money in IRAs from creditors.
Evaluate the potential impact of net unrealized appreciation (NUA) if holding appreciated company stock in your workplace savings account. You have a few choices to think about. You can stay in the plan. You can receive the stock directly. You can transfer the stock to an IRA or another employer's plan. Transferring the stock to another tax-advantaged plan will forfeit any NUA benefits.
Note: Self-employed individuals can also transfer an old plan into their own small business retirement plan, like a SEP IRA. Explore self-employed rollover alternatives for further information.
Transfer your 401(k) to a new employer's plan
Before proceeding, verify whether your new employer accepts rollovers from previous plans, as not all do.
Advantages:
Continued potential for tax-advantaged growth of your funds.
Streamlined management of retirement savings by consolidating 401(k)s.
Access to lower-cost plan-specific investment options in many cases.
Extensive protection against creditors provided by federal law. It may be possible to defer RMDs even if employed beyond age 73.
Penalty-free withdrawals permitted if departing from the new job at age 55 or above.
Considerations:
Familiarize yourself with the rules governing your new plan.
Evaluate the range of investment options offered by the new plan.
Assess the potential impact of net unrealized appreciation (NUA) if holding appreciated company stock in your workplace savings account. Consider options such as remaining in the plan, receiving the stock directly, or transferring the stock to an IRA or another employer's plan. Transferring the stock to another tax-advantaged plan will forfeit any NUA benefits.
Note: Self-employed individuals may also have the option to roll over an old plan into their own small business retirement plan, such as a self-employed 401(k).
Withdrawal
It's advisable to refrain from completely cashing out retirement accounts prior to retirement unless faced with an urgent need for cash and no alternative avenues exist. The implications of such actions vary depending on your age and tax circumstances.
If you withdraw from your 401(k) before reaching age 59½, the funds are typically subject to ordinary income taxes along with a potential 10% early withdrawal penalty. (However, there's an exception to the early withdrawal penalty if you ceased employment with your former employer in or after the year you turned 55 yet are still under age 59½. This exemption does not apply to assets rolled over to an IRA or to 401(k)s.)
If you are younger than 59½ and need to access your funds, consider withdrawing only what you need at the moment. This way, you can find alternative ways to get cash in the future. You can only choose this option if your former employer permits partial withdrawals. Alternatively, you can transfer the account to an IRA or another 401(k) and then withdraw the funds.
How the rollover is done is important too.
The method of conducting the rollover holds significance as well. When choosing between an IRA or your new employer's plan, it is recommended to go for a direct rollover. This process entails one financial institution sending a check directly to another. The check is addressed to the new institution, along with instructions to transfer the funds into your IRA or 401(k).
On the other hand, opting to have the check made payable to you is not advisable. In such a scenario, the IRS mandates that your plan administrator withhold 20% for taxes.
To add complexity, you must return the money to a tax-advantaged account within 60 days of withdrawal. This account can be a 401(k) or IRA. This implies that if you wish to retain the full value of your former account within the tax-advantaged realm of a retirement account, you must cover the 20% withheld and deposit it into your new account.
If you don't add back the 20%, you could lose tax benefits. You could also face a penalty if you're below a certain age. In essence, it's crucial to pay meticulous attention to the specifics when executing a rollover of your 401(k).
Make the decision that suits you best
When it comes to determining what to do with an old 401(k), various factors may be unique to your circumstances. Consequently, the optimal choice will differ for each individual. Should you choose to transfer your funds into another retirement account, ensure that the investment portfolio aligns with your risk tolerance and investment horizon.
If you opt for an IRA, note that your rollover funds will initially remain in cash. Therefore, you'll need to take an additional step to invest them.
Retirement plan regulations can vary between employers. It is crucial to know the policies of both your old and new employer. Understanding these policies is essential for planning your retirement effectively.
Compare the fees and expenses associated with the accounts under consideration.
If you're feeling overwhelmed or unsure, consider consulting with a financial advisor for guidance on decision-making.
Ultimately, prioritize making a well-informed decision that suits your individual financial goals and circumstances.
Sources:
https://www.fidelity.com/viewpoints/retirement/what-to-do-with-an-old-401k
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.