The days of working for the same company for thirty years and retiring with a gold watch and a pension, for most, are long gone. Chances are you will find yourself changing jobs a number of times over the course of your career – either by choice or as the result of a layoff or restructuring.
Each time you change jobs you’ll need to decide what to do with assets you’ve accumulated in your 401(k) or other employer retirement savings plan. These savings can represent a significant portion of your retirement fund, so it’s important you carefully evaluate all of the options before taking action.
Generally, you have four options for your retirement plan savings – roll the assets to an Individual Retirement Account (IRA), leave the funds with your former employer, move savings to your new employer’s plan, or withdraw or “distribute” the money. The following highlights some of the advantages and points to consider with each of these options.
Roll the assets to an IRA. Rolling your retirement savings to an IRA allows your assets to continue their tax-advantaged status and growth potential, the same as in your employer’s plan. You can continue to make annual contributions, if eligible. In addition, an IRA often gives you access to more investment options than are typically available in an employer’s plan. Depending on where you have your IRA, you also may have access to investment advice.
There are several more things to consider before rolling your assets to an IRA. Take a look at the fees and expenses, investment options, services offered, when penalty free withdrawals are available, treatment of employer stock, when required minimum distributions begin and protection of assets from creditors and bankruptcy you may receive with an IRA compared to those for your employer plan. Additionally, if potentially borrowing from your retirement savings is important, you should know that you can’t take a loan from an IRA (some employer plans may allow loans under certain circumstances).
Investing and maintaining assets in an IRA will generally involve higher costs than those associated with employer-sponsored retirement plans. You should consult with the plan administrator and a professional tax advisor before making any decisions regarding your retirement assets.
Leave the funds with your former employer. You may be able to leave your retirement plan savings in your former employer’s plan, assuming the plan allows you do so and you are satisfied with the investment options. While this approach requires nothing of you in the short term, managing multiple retirement accounts can be cumbersome and confusing in the long run. And, you will continue to be subject to the plan’s rules regarding investment choices, distribution options, and loan availability. If you choose to leave your savings with your former employer, remember to periodically review your investments and carefully track associated account documents and information.
Move savings to your new employer’s plan. If you’re joining a new company, moving your retirement savings to your new employer’s plan may make sense. You’ll need to check with the human resources department or plan administrator to see if this is possible. Moving your retirement savings to your new employer may be appropriate if you want to keep your retirement savings in one account, and if you’re satisfied with the investment choices offered by your new employer’s plan. This alternative shares many of the same features and considerations of leaving your money with your former employer as outlined above.
Withdraw or “distribute” the money. While it may be tempting to take money out of your retirement plan savings and splurge on a trip or big ticket item, you should carefully consider all of the financial consequences before cashing out. The impact will vary depending on your age and tax situation. If you tap into your retirement plan savings prior to age 59 ½, you may be subject to both ordinary income taxes and a 10% IRS tax penalty. If you absolutely must access the money, you may want to consider withdrawing only what you need until you can find other sources of cash.
If you happen to own large amounts of appreciated company stock in your 401(k), you should consider other options before rolling over these assets to an IRA or another employer plan. Favorable tax treatment of gains on the value of the stock may make it more beneficial to take a lump-sum distribution of the company stock and pay taxes now at a lower rate. This favorable tax treatment of appreciated employer stock is lost if it is moved into another retirement plan or IRA. Consult your tax advisor for more information.
Whichever route you take, it is important to understand your options and potential consequences before making the decision. Talk with your Financial Advisor and plan administrator before taking any action with the funds in your 401(k).
Each of these options has advantages and disadvantages and the one that is best for you depends on your individual circumstances. You should consider features such as investment choices, fees and expenses, and services offered.
Our firm does not provide legal or tax advice.
This article was written by/for Wells Fargo Advisors and provided courtesy of Brett Webb, Financial Advisor in Pinehurst, NC.
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