If you’ve been lucky enough to participate in a retirement plan at work, you’re already off to a great start saving for your retirement. When you decide to change jobs, make sure to maintain that momentum by making an informed decision about your savings. What you choose to do with your account balance, no matter the size, will have a significant impact on your finances when you retire.
Understand Your Options
If you’ve been saving in a 401(k) or other retirement plan, you typically have four options when you change jobs:
1. Take the money
You can request that your vested account balance be paid out to you. A big sum of money may be tempting, but there are two BIG reasons for not doing this.
• Taxes – You will have to pay taxes on the amount distributed from the retirement plan (excluding any Roth contributions). Your employer must withhold 20% of your balance and send it to the IRS as a prepayment of those taxes. So, the check you receive will only be 80% of your account. And when you file your tax return for the year, you will owe an additional 10% early distribution tax if you were younger than age 55 when you separated from your employer.
• Loss of future income – If you spend what you have already saved for retirement, you’ll have to start over building up your nest egg.
2. Leave it there
If you have a retirement savings balance of at least $5,000, you can leave your money in your former employer’s plan. (If it’s less than $5,000, your employer may automatically pay out your savings.) If you like the plan’s investment options and the services provided, and consider the fees to be reasonable, this might be a fine choice for now. There’s no time out of the market and you don’t have to fill out any paperwork. But the more time that goes by, the more likely you are to lose touch with that account and disengage from the services offered. You also cannot make any new contributions or take a loan from that account.
3. Roll it over to your new employer’s plan
If you’re working for a new employer that sponsors a retirement plan, you may be allowed to roll over your 401(k) account to your new employer’s plan, tax-free. This move would allow you to consolidate the savings you’ve already accumulated with the contributions you’ll be making to your new plan. This would also increase the amount available for you to take as a loan from the plan if you have a future financial need (if the new plan allows loans). Be sure to consider the investment options available in your new plan, the fees charged, and the services provided to see if consolidating your savings in an employer plan makes sense for you.
4. Roll it over to an IRA
Many individuals choose to roll over their employer plan savings to an IRA. If you roll over all of your savings from a pre-tax retirement plan account to a Traditional IRA, there will be no tax consequences and your savings can continue to grow tax-deferred. You can make additional contributions to an IRA as long as you have earned income, and you can take withdrawals at will. You can also use an IRA to consolidate multiple retirement accounts, which may ultimately reduce your administrative fees and make it easier to manage your investment portfolio. Although you may find higher fees for some investments in an IRA vs. in an employer plan, you will have access to many more investment options in an IRA. If you set up a self-directed IRA, you could choose from just about any type of alternative investment that fits your interests or investment goals, including private stock, real estate, crowdfunding, etc.
Things to Think About
Here are some questions to help you think about what’s important to you as you consider your distribution options.
• What type of investment options do you want (e.g., alternative investments, socially responsible investing opportunities)?
• What are the fees and expenses associated with the investments and administration for each type of account?
• Do you want to continue making contributions to the account and what type of contributions (pre-tax and/or Roth)?
• Do you want to consolidate other retirement accounts into one account?
• What withdrawal options do you want now (loans, at-will distributions) and later (installment payments, annuitization)?
A financial advisor can help you prioritize your interests, compare investments and fees, and put a value on the less tangible benefits.
For more information, see STRATA Trust’s Rolling Over Retirement Savings on our website.
If you have questions, please contact STRATA Trust at 866-928-9394 or Service@StrataTrust.com.