401(k) Rollovers: Options, Obstacles, and Opportunities

Deciding what to do with your 401(k) when changing jobs requires a close assessment of your individual situation and an understanding of the alternatives available to you. Before making any decisions, the first step is to familiarize yourself with the four options below. Once you know the basics, you’ll be better equipped to make an informed decision on how to handle your job change and 401(k) plan.

Leave Your 401(k) with Your Former Employer

 Your former employer is legally required to allow you to keep your 401(k) in their program if you have $5,000 or more invested. At the very least, leaving your 401(k) in place temporarily will give you time to consider all of your options while your savings remain tax deferred. And if your new employer requires you to work for a certain length of time before participating in their 401(k) plan, this may be the best short-term solution for you. Other factors to consider include the types of investments in your 401(k) account. If you own stock as part of your retirement plan, transferring your investments may have tax consequences. Also, if your former employer has lower administrative fees and better investment options than your new company, leaving your 401(k) in place may work well for you.

Transfer Your 401(k) to Your New Employer

Taking your 401(k) with you will likely give you more control over your investments and provide access to benefits and services you miss out on by staying with your previous employer. Contribution matching and financial counseling are two such benefits and services generally offered only to current employees. Another advantage is that administrative fees are generally lower when you work for the company. Keep in mind, rolling your retirement savings over from one 401(k) plan to another maintains the tax-deferred status of your funds. By moving your plan with you to your new employer, you can continue to contribute to your 401(k), something you may not be able to do with your previous employer, and you avoid creating multiple 401(k) accounts to manage over time.

Move Your Retirement Funds to an IRA

Rolling your 401(k) into an individual retirement account (IRA) allows you to continue your tax-deferred savings and gives you the most control over your retirement investments. In most cases, IRA plans offer a much broader range of investment options compared to 401(k) plans, while at the same time providing similar benefits and services. There are different types of IRAs available, and determining the right choice for you depends on a number of factors including income level and investment goals. In addition to offering greater control, IRAs are a great way to consolidate multiple 401(k) accounts. But be aware, an IRA is subject to different rules and regulations than a 401(k) which results in different tax implications for the account holder.

Cashing Out Your 401(k)

Cashing out your 401(k) is the least preferable option for most people. Taking a cash distribution comes at a substantial cost. Depending on your age, you may be subject to a 10% early withdrawal fee in addition to other taxes and penalties. And once the money is withdrawn, the funds can no longer grow on a tax-deferred basis. That said, for those in need of immediate cash, this is an option to consider.

At Wickham Financial & Insurance Services, we understand that saving for retirement is a long-term commitment. Making the right decision with your 401(k) could potentially save you thousands of dollars. If you are changing jobs or considering making a move, we encourage you to meet with one of our advisors to determine which of the four options above would be the best fit for you.