401(k) Options After You’ve Left Your Job
Have you been diligently saving money in your 401(k)? What should you do with it when you switch jobs? There are four main options to consider, and one of them should be used only when absolutely necessary.
So, you have been laid off or left your previous employer. This transitional period may be full of decisions, such as balancing unemployment insurance, health care insurance, and other important life decisions. Of course, retirement planning is still important, but what are your options with your old 401(k)?
Stay in the existing plan
Most companies will allow you to keep your retirement savings in their plans after you leave. Your money will continue growing tax deferred. However, if you have less than $5,000 in your account, your money may be automatically cashed out and sent to you.
As you progress through your career it is likely that you will have multiple employers. According to a Bureau of Labor Statistics 2019 study, the average worker who was born between 1957 and 1963 held an average of 12.3 jobs during their career. If you choose to leave your 401(k) at each employer that you leave, by the end of your career you may have several accounts that you need to keep track of. Multiple 401(k)s may also lead to certain plans not being aligned with your risk tolerance as you move closer to retirement.
Move the money to a new employer’s plan
If you start a new job with an employer who offers a 401(k) plan, you will be able to roll over your assets to the new plan. This will give your assets the ability to continue growing tax deferred while consolidating into one plan. Most 401(k)s have a wide range of investment options, but you will still be limited to the investment funds offered within the new plan.
Roll over the money to an IRA
You can roll over the funds to an IRA with a bank or brokerage firm. This IRA can be used every time you need to roll over a 401(k) without having to open a new account each time. The money will continue growing tax deferred and will be available for you in retirement. Some 401(k)s allow for a post-tax Roth contribution. If your former contributions were going into the Roth, you can roll the money into a Roth IRA.
IRAs offer you more investment choices than 401(k)s as you can invest in anything from stocks, bonds, mutual funds and more. There are many online platforms that enable investors to buy and sell investments on their own. But if this sounds like it is outside your comfort level, you can find a financial adviser who will help you manage your investments while planning for retirement.
Cashing out your 401(k) is an option, but it should be considered only if there is an immediate need for the money. This option will set you back when planning for retirement. The withdrawal will be taxable at both the federal and state level and you may incur an early withdrawal penalty of 10% if you are not yet 59.5.
Napoli Tax Services LLC is a CPA firm that can best provide you both Personal and Business Tax and related Financial planning services and advice and we are also open year-round to assist you.