What should I do if my 401(k) is less than $5,000?

Saving for retirement can be daunting. In fact, 1 in 5 Americans have less than $5,000 in savings earmarked for retirement. And that number might be larger, as almost half of survey respondents admitted they don’t know how much they have in retirement savings. While $5,000 may seem like an insignificant step in a long journey to retirement, it’s important to invest in yourself and manage your hard-earned savings in a way that yields the best reward.

What to do if you’re changing employers and your 401(k) is less than $5K

Typically, there is a lot of transition during a job change. While tying up loose ends and transitioning job responsibilities with your old employer, employees are simultaneously gearing up for the challenge of a new job. Amid all of this change, managing a 401(k) with less than $5,000 may slip through the cracks. But it’s important to address for your long-term financial health.

The upside of a low 401(k) balance: You may have more options available when you switch employers.

  • If the balance is less than $5,000 you can cash it out or take it with you.
  • If the employer allows it, you can leave the money where it is – but typically, that option is reserved for accounts with more than $5,000.
  • If you like the investment options offered by your new employer, simply move the money directly to the 401(k) plan offered by your new employer with no tax consequences or penalties. But keep in mind, this needs to be done within 60 days to avoid tax penalties.
  • If you are interested in managing your own investments, or if you anticipate a short stint with your new employer, you can roll the money into an IRA and manage it yourself. There are no tax penalties and this offers stability if you don’t want your investments to be tied to an employer.

Keep in mind, if you don’t make a decision, your former employer might make it for you. If you have under $1,000 in the account, the plan is allowed to send you a check, which could trigger taxes and penalties if you don’t put it into another retirement account in a timely manner.

What to do if you’re staying in the same job and your 401(k) is less than $5,000

Congratulations, you’ve taken important first steps in your journey to a happy retirement. Now it’s time to increase the momentum. Revisit your contribution rate and strive to contribute enough to maximize your company’s matching contribution, if available. One quarter of 401(k) participants don’t contribute enough to qualify for the maximum matching contribution from their employer. If you are unsure whether your employer offers a match, or what the match amount is, check with your Human Resources department. With or without matching, once you increase your contribution, it’s an easy hands-off way to build your savings.

The least favorable option

Whether you stay or go, the worst option is cashing out and spending your 401(k) savings. While tempting, this is not a smart move toward long term financial health. Financial downsides include income tax on the money withdrawn along with an early withdrawal penalty if you are under the age of 55. Plus, while it may seem like a small amount in relation to your long-term savings goals, it will cause you to lose momentum. Instead, commit to managing your 401(k) and before you know it, you’ll see it grow from the thousands to tens of thousands. It’s rewarding to watch it grow and get peace of mind.

Wickham Financial & Insurance Services works closely with our clients at all stages of the journey to retirement and helps them understand their financial needs. Contact one of our financial advisors to learn how we can work together to maximize your retirement savings.

Any information provided has been prepared from sources believed to be reliable but is not guaranteed, does not represent all available data necessary for making investment decisions and is for informational purposes only.