Four Options for Your 401(k) When You Change Jobs
According to a study by the Bureau of Labor Statistics, it's estimated that the average American will have somewhere between 12 and 15 jobs throughout his or her working life.
Even if you're well below that average, you're likely to work for a handful of employers during your career. To retire comfortably, you'll want to take advantage of any work-based retirement plans that your employer might offer. This will become even more important if your employer offers a match. When you quit one job and start another, you'll likely have invested through a 401(k) or 403(b) plan with your former employer. If you're wondering what to do with your orphaned retirement plan, there are basically four options.
1. Cash Out Your Account
Selling your investments and cashing out the proceeds is the first option you can choose when dealing with a retirement account from an old employer. However, most experts will tell you to avoid this course of action. Unless you're in desperate need of cash, this option is usually not a good idea. If you've invested through a traditional plan, you'll owe income taxes on your contributions and any gains earned in the account. Additionally, if you've not yet reached 59.5 years old, you'll owe an additional 10% penalty for the early withdrawal. Combined, you could wind up losing between 30% and 45% of your retirement savings to taxes and penalties if you're in a higher tax bracket.
There are a few exceptions to the early withdrawal penalty, but you'd still owe the income tax for the amount of the withdrawal. In addition to the taxes and penalties you'll have to pay, you'll also miss out on any additional tax-deferred growth your account might provide in the years to come.
2. Leave Your Account Alone
Doing nothing is the second option you have for your old retirement account. Many retirement plans will allow former employees to park their retirement savings right where they were at the time the employer and employee separated. If your former employer has a nice range of funds combined with low fees and good returns, this can be a great option. On the other hand, should your new employer have better fund options, leaving your retirement fund might not be a good idea. Remembering where all of your orphaned funds are located could be a challenge if you have plans with several employers.
3. Move Your Funds
If your new employer offers a work-based retirement plan, you could opt to transfer your old 401(k) into your new employer's plan. This can be a great option if you're looking to keep all of your retirement savings under one umbrella. There is no need to monitor multiple accounts if you choose this option.
If your new employer has limited fund choices, you may want to choose another option. This idea will make less sense if the 401(k) options at your new employer come with high fees. In recent years, management fees have become more competitive, so you'll want to weigh the relative benefit of making a transfer. Every dollar you pay to a fund manager is a dollar that cannot grow. This might be fine if your mutual fund regularly outperforms other similar funds. If it does not, you'll probably want to opt for another choice. If you choose this option, you'll want to have your old fund make a direct transfer into the new fund to triggering a taxable event.
4. Roll Your Funds Into an IRA
When changing jobs, the final option you'll have for your retirement fund is rolling your old account into an IRA. You'll have two options when you decide to move your 401(k) into an IRA. There are traditional IRA accounts, and there are Roth IRA accounts. A transfer from a traditional fund into a Roth IRA is called a conversion and would constitute a taxable event. You'd owe regular income taxes on the amount you choose to convert. You will then owe no taxes on this money as long as you leave it in the account until age 59.5 years. At that point, you can make tax-free withdrawals from the account.
If you transfer your retirement fund from your old employer into a traditional IRA, you'll have to pay taxes on the money when you withdraw the money, ideally after age 59.5 years. One of the biggest benefits you'll have with an IRA is the ability to choose your investments. The investment options you have with an IRA are nearly limitless.
If you're in the process of weighing your options with a former employer's retirement plan, be sure to look to the financial professionals at Truliant Federal Credit Union available through CUSO Financial Services, L.P.*. We understand the intricacies of the IRA landscape, and we'd love to help you choose the option that makes the most sense for your particular situation. Give us a call today to set up a consultation.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA / SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
CUSO Financial Service, L.P., and its representatives do not provide tax advice. For specific tax advice, please consult a qualified tax professional.