Changing jobs introduces a new dilemma for people, regardless of why or how often they do so: what to do with the 401(k) account they had with their former employer. Often times, this can be an afterthought when switching jobs, but it’s important to determine what steps you need or should take to ensure your retirement savings are set up for success.
Consider All Options
When managing your 401(k) during a job change, consider these options:
- Take the cash: When people make financial decisions, they may choose to do so based on interest rates and cash in hand. But another important factor to consider is taxes. When you take cash distributions from your 401(k) account, you may pay a lot of money in taxes and fees. This includes a 20% federal withholding tax and then another 10% penalty for people who are under the age of 59 and a half years old.
- Directly roll the money into an IRA: An individual retirement account is much like a 401(k), but it can remain independent of any employer. You may want to consider this option if you change jobs often or if a new employer does not offer retirement plans.
- Use the new employer’s plan: Some professionals prefer to keep rolling their 401(k) savings forward. You may want to consider this option if you mostly work corporate jobs with good 401(k) plans. Rolling the money over directly from one employer to the next may also help to eliminate any fees from the IRS. Note that even if you are not yet eligible to contribute to your new employer’s retirement plan, you should be able to roll over your money.
- Keep the old plan: If you have at least $5,000 in your old retirement account, your employer must allow you to retain your 401(k) account if you want to. You can no longer make contributions to the account, but you can make decisions regarding the investment of your assets. You may want to consider this option if you leave your job to start a business, or want to add some diversity to your retirement holdings.
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The Importance of Research
The right approach depends on a number of factors. Aside from those mentioned above, you should consider the rules at your company as well as longevity. Is the company in financial trouble? What happens to your retirement plan if it goes under? Some employers may also set lower thresholds to allow former employees to leave their retirement accounts behind. Speak directly with the human resources department to get some answers.
Another good source of reputable information is financial professionals. At Centra Financial Services, our team helps clients to navigate these and other important decisions that impact their economic future. Start working with one of our professionals today. We’re here to help!
1https://www.gallup.com/workplace/231587/millennials-job-hopping-generation.aspx
2https://money.usnews.com/money/retirement/401ks/articles/what-happens-to-your-401-k-when-you-leave-your-job
3https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-termination-of-employment
This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own separate from this educational material. Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com ©2022 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this newsletter are those of Kmotion. The articles and opinions are for general information only and are not intended to provide specific advice or recommendations for any individual. Nothing in this publication shall be construed as providing investment counseling or directing employees to participate in any investment program in any way. Please consult your financial advisor or other appropriate professional for further assistance with regard to your individual situation.