When you leave a job, it is common for life to shift into a different gear. Sometimes, it feels like GO time and you are running at full speed with little time to waste. Other times, it may be the change of pace you needed to slow down and evaluate your next steps or appreciate the good things. While the feelings and emotions around a change can be different, any disruption to our career path will result in us having to make some important financial decisions. One of the most important financial decisions that you may be faced with is what to do with your former company retirement plan.
Here are 4 options that you may consider when you are trying to keep your retirement savings on track.
1: Transfer the money to your new plan
If you are starting with a new company right away, you most likely will have some new benefits to consider. Your new company retirement plan will most likely allow you to transfer your old plan. This is typically an easy process and allows you to continue from where you left off for the most part. Here are a few important factors to consider when transferring money to a new plan:
The investment options in the new plan will most likely be different and you are usually limited to these options.
Each company plan has different costs and plan rules. Make sure to read your new plan’s summary plan description to get all of the information.
You may have a waiting period before you are eligible for the new plan.
Make sure the new plan has all of the benefits you are looking for as far as contribution options, etc.
2: Roll over your money to an IRA
You can keep your money growing tax-deferred and take control of your investment options by rolling your money into an IRA. With this option, you are not subject to plan rules, so you typically have few restrictions when accessing your money. Here are a few items to consider with this option:
You typically have more investment options with an IRA, so you can control your investment direction with more flexibility.
You typically have greater flexibility with your tax withholding when withdrawing money from an IRA.
However, you may give up the option to take a loan on your money that you may have if your assets were in a company plan.
It is important to consider the expenses of the IRA and compare them to your other options.
You may be subject to required minimum distributions if your money is in an IRA, whereas if you are still working past age 72 money in a company plan would not be subject to RMDs until you retire.
3: Leave your money in the old plan
You may have the option to leave your money where it is. This can be a good option if you are retiring before 59 ½ as you can take penalty-free withdrawals from your company plan between the age of 55 and 59 ½. Here are some other important things to consider:
If you have a small amount in your account, you may be forced to move money out of the plan.
It is important to make sure your contact information is updated and current with the plan and your employer so that you receive information regarding the plan and can access your account.
Your investment options are limited to what is offered in the plan and your plan costs are set by your former employer.
Your money will continue to be subject to the plan rules and you will not be able to contribute to the account.
4: Cash out your money
You may feel like you need to use this money and are considering a cash-out. Keep in mind that this money is usually subject to taxation and a premature withdrawal penalty. Here are other options to consider:
Your plan will most likely require a minimum Federal tax withholding of 20% when you take a distribution paid out to yourself.
If you are under 59 ½, you will most likely be subject to a 10% withdrawal penalty, unless certain conditions are met.
Image Source: Capital Group American Funds. What to consider when leaving your employer. 2022 There are many things to consider when evaluating your 401(k) options and the choices you have regarding your retirement plan. It is helpful to look at the big picture and consider your long-term goals. You have worked hard to save your money and it is important to stay on track, so during your career change it may be a good idea to review your retirement plan, your risk tolerance for your investments and your overall investment allocation.
Bonus: Here are some helpful items when moving your money from a retirement account
Make sure you have a current statement of your account and can access the account online
If you are transferring or rolling over your money, you will need to open your account at your new institution first.
After your new account is open, you will need to contact your old account institution to direct the transaction. This means you will typically have to call the institution or log in to your account and request a transfer/rollover. Sometimes the former institution will require paperwork and sometimes they will take online/phone requests.
It can be helpful to have someone that you can rely on to talk through your financial choices. If you need any assistance or guidance you can schedule a 401(k) call with Centered Financial.
Centered Financial, LLC is a registered investment adviser offering advisory services in the State of California, Utah, Texas and in other jurisdictions where exempted. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. There is no assurance that the techniques, strategies, or investments discussed are suitable for all investors or will yield positive outcomes. To determine which strategies or investment(s) may be appropriate for you, consult your financial adviser prior to investing. Any discussion of strategies related to tax or legal planning is general and is not intended as tax or legal advice. Please consult appropriate tax and legal professionals for recommendations pertaining to your specific situation.