The new year often means a career change for many people. But what does a new job mean for your retirement plan? Here’s what you need to know about changing jobs and your employer-sponsored retirement plan.
Typically you have four options – you can leave your money in its account, transfer it to an IRA, move it to your new employer’s plan, or cash out. Each option has implications for your finances, so here are some more details on each one:
Transfer into an IRA
This is an easy option that provides a few key advantages, most notably:
• You avoid taxes and penalties, which means your savings doesn’t take a hit
• You preserve your tax benefits
• Your savings become easier to manage – you’ll have fewer statements, and when it comes time to take your Required Minimum Distributions, you will have a centralized source.
• If you elect to transfer into a Roth IRA, you will avoid RMDs – you can withdraw at your own pace, which is particularly appealing if you anticipate having multiple sources for your retirement income.
• Your investment assortment may grow, since IRAs tend to offer more investment options than a traditional 401 (k).
However, be mindful that if you have company stock in your 401 (k) that has increased in value, then you should explore other options aside from an IRA, since company stocks moved to IRAs are taxed as income when withdrawn.
Keep your savings in your old 401 (k) plan
Many companies will allow you to keep money in your old 401 (k), even after you’ve left. This is certainly an easy option, and it has several key benefits:
• You retain the plan’s investments, fees, and features, plus you buy yourself some time to decide what you’d like to do with your money (all while earning more money)
• You avoid immediate taxation and penalties, and you preserve your tax benefits
• You have the option to transfer your savings at any time – typically once you leave a company, you are free to take distributions whenever you’d like, so you can move your money into a new account at any time.
• If you leave your job in or after the year you turn 55 (50 for public employees such as police and firefighters), you can take penalty-free withdrawals from the account.
You should keep in mind that if you have less than $5,000 in the account, you may not have this option and the plan may automatically roll the money into an IRA. If you have less than $1,000 in the account, you may simply receive a check.
Move your savings to your new employer’s 401 (k) plan
You are not required to move your savings into your new employer’s 401 (k) plan, but it may be the simplest, most streamlined solution for your money. You also benefit from a few key things
• You avoid immediate taxation and penalties
• You preserve your tax benefits
• You may be able to postpone the RMD past age 70 if you are still working
Be sure to fully understand your new plan’s rules, distribution parameters, and fees before you move your savings into a new 401 (k).
Cash out your savings
This seems, on the surface, like an attractive and easy way to access your funds. However, you should know a few things before cashing out your old 401 (k) plan
• The amount you withdraw will also be added to your taxable income, meaning you could lose as much as 49.6% to federal taxes
• You will have less money leftover to reinvest back into a retirement savings option, which will affect your long-term planning
In some cases, you may decide the penalties are worth it – but you should make sure you understand what they are before deciding on the cash out option.
If you have questions about how a job change will affect your retirement plan, then we’re here to help. Contact the Robin S. Weingast & Associates team for more information about how to make the decision that’s best for you.