Moving to a new job can be an exciting time filled with new opportunities. If you have been in your previous job for some time, you have probably accumulated some funds in the employer-sponsored retirement plans. One of the opportunities you have in this new transition is to manage those funds, and you have several options.
Especially if you are under 59.5, you do not want to distribute the funds from the 401k for cash. Distributing pre-tax money will cause you to incur a 10% penalty, plus taxes at your income tax bracket. Even if you are 59.5, if you are still in the workforce and have other sources of income, the distribution of pre-tax money from your 401k plan will be added to your income, increasing your tax liability for the year. There are better ways to handle the balance.
You may have the ability to leave it in your previous employer’s 401k plan. If your current employer won’t accept the rollover, or you don’t know how to handle the balance yet, you can leave it in your previous employer’s plan. If you have other retirement accounts, or plan to contribute to your new employer’s plan, this could be burdensome as you will have more than one statement for your retirement savings. Also, sometimes consolidating the assets can reduce fees overall.
Roll Over to Your New Employer
If your new employer accepts the rollover of funds from previous plans, you may consider rolling over to your new employer’s plan. Before doing so, you want to be sure that you understand the fees in that plan and the investment options. Employer-sponsored 401k plans can have more restricted investment options than may be available in an Individual Retirement Account (IRA).
In addition, once the funds are in the plan, they are subject to the rules of the plan. This means that if the plan does not allow for distributions until age 59.5, you will not be able to access the funds for emergencies. Although the funds should be used for retirement and saved in the account until at least 59.5, this is more limited than if the funds were in your own IRA.
Roll Over to an IRA
You can roll over the funds into an Individual Retirement Account (IRA) and partner with a financial advisor to manage the savings, or do it on your own. The investment choices will likely be more expansive than the predetermined menu of an employer- sponsored plan. Also, if you did need to access the funds, you have more flexibility in an IRA than in an employer-sponsored plan. With this option you should be careful as the fees and costs involved in rolling over to an IRA can be substantial.
If you plan to be at your new employer for a long period of time, it may make sense to have an IRA. As you continue to work at your current employer, your employer-sponsored plan will become a larger piece of your retirement pie. By having the IRA separate, you have an account with greater flexibility in both accessibility and investment options.
CFP ®, ChFC ®, AIF ®, Series 7 & 24 Securities Registrations,* Series 66 Advisory Registration,† Insurance License Having worked in the industry since 2007, Adria regularly meets with clients and works closely with the Roundtable™ team of specialists to develop financial plans that are specifically geared toward their values and retirement goals. She is involved in her Arlington Heights, IL community through Our Lady of the...Read More