Guest contributed by Sarah Landrum
You consider many factors when transitioning from one position to the next.
How quickly will you adjust and pick up new duties? Do you fully understand your benefits? How do you take your old accounts with you?
Reconciling new benefit offerings with old accounts from previous employment, such as an existing retirement, gets confusing when you’re taking in too much information all at once.
The good news: That money you worked so hard to save for retirement belongs to you, wherever you go. Here’s what to do with it.
Look at Your Retirement Goal Status First
Before you consider what to do with your money, now is the time to look at where you are with your retirement goals. Are you working toward a secure retirement? Look at your total retirement goal and potential withdrawals every year and play with projections for your current contributions and new employer matching contributions while weighing your circumstances.
For example, say your current retirement savings is $100,000, and you expect an income increase of 2 percent. You can factor this into your retirement plan along with Social Security benefits and other income to stay on track with your goal. Don’t forget to factor in if you’re married, since adding a spouse affects your Social Security benefits.
Options for Your Existing 401(k)
Here’s where it gets tricky. Your old 401(k) account belongs to the prior employer, but the money belongs to you. Here are the four options you have for what to do with your existing 401(k), as well as the advantages and disadvantages of each avenue.
1. Keep Your Old 401(k)
Look at your existing balance and reread the terms. You may have to move your money since the account belongs to the employer. Otherwise, the old 401(k) usually sits there without contributions from you or the employer. Different rules exist for different employers regarding what’s done with the money, with some automatically cashing out your funds to you or transferring the amount to a new IRA for you. If a check is made out to you, the company automatically cuts out a 20 percent portion to cover taxes. Check with your prior employer and reread the terms.
2. Transfer the Money to the New 401(k)
When your new company offers a 401(k) or other retirement option, consider transferring the money from your old account to the new one. Ask: does the new plan terms accept transfers from prior 401(k) accounts? What fees apply?
Sticking with a 401(k) option over an IRA has its advantages. Money must come out as of age 70.5, but if you’re still working, you can delay distributions with your current employer 401(k) plan until your actual retirement date and maximize your earnings. In the case of bankruptcy, your 401(k) remains protected, but IRA exemption stops after $1,283,025. At age 55, you can also take cash penalty-free from your 401(k) if you leave your position.
3. Move It to an IRA or Roth IRA
Skip thoughts of 401(k) confusion and transfer your balance to an existing IRA if you have one — or open a new IRA. A perk of a traditional IRA is the avoidance of taxes by transferring the money to this type of retirement account, but a Roth 401(k) must be transferred to a Roth IRA. You must look carefully at terms and fees when rolling over to an IRA. Otherwise, you may pay more than transferring to the new employer 401(k). Companies are required to provide reviews of annual investment costs and disclose administrative fees.
Younger baby boomers change jobs about 12 times over the course of their careers, and leaving 401(k) plans behind overlaps multiple funds that may exceed your risk tolerance and age. If you’ve left more than one plan behind, consider rolling retirement accounts into an IRA. Many IRA plans contain lower investment costs and options to invest in exchange-trade funds (ETFs) to reduce costs and risk.
However, mutual funds and ETFs come with expense ratios, which vary whether that’s an IRA or 401(k) — look closely at costs, talk with your broker or ask for the disclosure of fees and ratios yourself. Slowly decreasing your stock investment amounts in your portfolio reduces your risk as you and your portfolio age.
4. Withdraw the Balance
It’s best to wait until you reach age 59.5 to withdrawal your retirement balance, or you face paying on the withdrawal as taxable income. Plus, you experience the joy of the 10 percent penalty due to the withdrawal of your balance and your funds won’t grow.
Most advise against withdrawing retirement balances unless you’re facing an emergency you need to pay a significant amount of money toward quickly. What you consider an emergency may not be worth it in the end, such as buying a house, paying credit card debt or helping your kids offset unplanned college costs. For example, it’s better to take an approved IRA distribution for college costs than to face the 10 percent tax penalty for withdrawal. You can slowly replace the distribution over the years but paying thousands in a tax penalty hurts your take-home income and drastically reduces your retirement earning benefits.
In the end, you selected the retirement strategy that best-suited your long-term goals but changing jobs and emergency life situations arise that prompt you to take another look at your approach. Multiple accounts are difficult to manage and rolling over everything into a single account or Roth IRA outside of your 401k may reduce fees and boost your earnings in the long-term. You’ve come this far and likely know what you want to invest in. Go with the plan that best meets those needs, and if that means transferring funds to the new employer’s 401(k) — do it. If you have or are taking on significant debt, go with a plan that protects your assets and reconsider any emergency needs. Then, update your retirement plan with a strategy that optimizes your savings.
Disclaimer: The views and opinions of guest contributors are not necessarily those of theglasshammer