With the current economic environment, many people may find themselves between careers. One question that seems to come up often is, what do I do with my 401K? If you have been contributing to a 401(k) or other type of employer sponsored retirement plan, you may not be aware of all your options.
If you have an employer sponsored retirement plan, there is a good chance that the funds you have been contributing to the plan are tax deferred funds, which means taxes have not been paid on those funds. If you have lost your job recently or are between careers, this is a good time to evaluate what to do with those funds. Let us look at some of them.
Leave it Alone
You do not have to do anything at all with your plan typically. Your retirement plan usually has the option to allow you to leave it in the plan even after you are no longer working for that employer. There are instances where you may have to move your funds, depending on the balance in your account, if it’s below a certain threshold the plan may make it mandatory for you to do something with your funds. In some instances, maybe your company’s plan is being terminated and they are requiring you to move your funds. For the most part, you can continue to leave the funds in the plan.
Take a Withdrawal
You may be eligible to withdrawal the funds without a tax penalty, but if you’re under the age of 55 and have left your employer either voluntarily or involuntarily, your options become very limited as to what you can get an exception for to the 10% penalty on withdrawing those funds. Keep in mind any withdrawal you make from a tax deferred retirement plan such as a 401K, Pension, SIMPLE IRA, 403b, etc. will be considered taxable income to you. Even if you can find an exception for the 10%, you will still more than likely be out at least 20% for the taxes, which is the mandatory withholding amount on 401k plans. In some instances, depending on your income for the year, this could even put you in a higher income bracket, which compounds your tax liability. A common question I get a lot is, “should I take a distribution to pay off my house?” I have another article that will provide you with much better insight on that common question. You can access it at the link here: “Should I Pay More on My Home or Should I Save More?”
Rollover my Retirement
The most common option people look at doing is rolling over their retirement plan into an IRA. This is where you set up an IRA with an advisor, a bank, or online company to hold your retirement funds. Once you have one of these accounts established, you can then direct your 401K plan sponsor on where to send those funds. This is typically simple with the help of an advisor who can guide you through the process. It usually involves filling out a form or making a phone call. Now, the funds that were in your retirement plan, will be moved to the IRA, but the key is that they are able to maintain their tax deferred status, so you will not be penalized or taxed on this transfer of funds.
Why do a Rollover?
When you rollover your funds to an IRA, there are some more favorable distribution options under an IRA that do not exist under the 401K plan to avoid the 10% penalty if you are under the age of 55. That should not be the main reason, but it could be a possible reason to move your funds. If you do need the funds, its typically easier to deal with an advisor you trust to get those funds and help you make sure you are making the best decisions, rather than it is to deal with the 401k plan who you may not know who to contact for you distributions. Depending on your reason for leaving the company, a lot of times people prefer to sever their ties with their prior employer and the employer sponsored retirement plan is usually one of those. The biggest advantage to rolling your funds over to an IRA, in my opinion are that you can consolidate your retirement funds to keep better track of your goals, you get to deal with an advisor or platform you know and trust, and the biggest advantage is that if you deal with an advisor, you get a much broader selection of investments to choose from. The biggest downside to most employer sponsored plans is that they only offer a very short list of investment options for you to choose.
The concept you should keep in mind is that these are still your retirement funds. Just because you can rollover the funds or access the funds does not mean your first reaction should be to withdrawal the funds. Even if you do decide to withdrawal the funds, working with an advisor can help keep you from making a major retirement mistake that not only costs you more money now in taxes and penalties, but it could cost you a significant amount to your future self.
Please be sure to speak to your financial professional to carefully consider the differences between your company retirement account and investment in an IRA. These factors include, but are not limited to changes to availability of funds, withdrawals, fund expenses, and fees