Change of a job can bring both excitement and nervousness. As many are excited about the new opportunity, many are confused about what to do with their old 401k plan. Also, if you are retiring, you probably have similar questions. As you bid farewell to your old workplace, don't forget about your 401k with your employer. There are four options you can consider.
Because a 401(k) plan may be a considerable part of your retirement savings, working with a knowledgeable advisor is vital when choosing the right option.
A 401(k) is the most popular employer-sponsored retirement plan in the US. Because it is a tax-deferred contribution, it allows you to efficiently save for retirement since taxes are not paid on the funds until you leave your job or retire. So, what should you do with your old 401(k)?
Consider these four options:
According to IRS data, approximately 5 million Americans roll over their 401(k) into an IRA every year. One benefit of a 401(k) rollover to an IRA is that you have more investment options. If you decide to roll your money into an IRA, make sure the money goes to the new IRA account within 60 days. Also, you can rollover from a traditional 401(k) account to a pre-taxed conventional IRA account.
Some companies allow you to maintain your retirement savings in their plans after you leave. If your former employee has good investment options, this could be a favorable option. Some of the benefits of leaving your 401(k) with your ex-employer are that your money will grow tax-deferred, and you might access loans and distribution plans.
You can also opt to roll over into your new employer's 401(k) plan, making it easy to manage your money. But first, find out if your new employer offers a 401 (k) plan. By rolling your 401(k) to your new company's plan, your money grows tax-deferred.
If you have not hit 59 1/2, withdrawing your 401(k) is generally not a good idea unless it is an emergency. One downside of cashing out is paying taxes on the withdrawn money and a 10% penalty. Also, your 401(k) savings will not grow tax-free for many years. An experienced financial advisor can advise you on 401(k) rollover rules and help you take control of your funds.
While having cash at hand may be necessary in times of need, don't forget the penalties and taxes that are steep.
When allocating your 401(k) savings, you decide where your contributions to the plan will go by distributing it into investments of your choice. However, for hassle-free investing, work with a financial planning advisor who will advise on the right mix of assets to invest in according to your retirement goals.
Your money in a 401(k) retirement plan is considered as "solid assets.” However, after retirement, the funds become "liquid" and are taxable. You can withdraw the cash without facing the early withdrawal penalties. I will help you in liquidity management to ensure timely access to your funds without incurring any losses.
If you are thinking of withdrawing your 401(k) funds, it is wise to educate yourself on the distribution vs rollover consequences. In a distribution, you take out money from your retirement plan account. Distributions are taxable unless you roll over the funds to another retirement plan. A rollover is a tax-free distribution of cash from one retirement plan you contribute to another. This mostly happens when you are moving from one company to another.
However, you can also consider an in-service rollover where you transfer your funds from your current employer's 401(k) plan to an IRA while still working in the same company.
Planning for retirement on your own can be overwhelming. Don’t navigate this critical process alone. I can help you build a suitable plan to save for retirement that will encourage your retirement income to grow. At Feehan Wealth Management, we will help you convert your 401(k) into a monthly income stream after you retire to ensure you enjoy your golden years. Contact us today and learn more.
What is a 401(k) rollover?
A 401(k) rollover is when you transfer money from your current retirement plan to an IRA or a new employer’s plan.
After leaving a job, how long do you have to roll over a 401(k)?
According to the 401k rules, you should rollover your 401(k) plan funds to a new plan within 60 days.
What happens if I don't rollover my 401k?
If you take a lump-sum distribution from your 401(k) after leaving an employer, and you deposit those funds into a checking account, the money will be subject to income tax (and an early withdrawal penalty of 10%) if you're under the age of 59 1/2. However, if you rollover your 401(k) funds into a qualified IRA, then you may avoid paying income tax and the early withdrawal penalty. Considering the rate that Americans change jobs, it's easier to lose track of retirement savings held at your ex-employer's 401(k) plan. Keeping your asset portfolio organized will help you not to forget about it.
Can I move my 401k to an IRA without penalty?
You can rollover your funds from your employer's 401(k) plan to an IRA without incurring a penalty. However, make sure you do it within sixty days.
Can I live on my 401k?
It depends on your savings in your retirement plan account and your needs. If you have enough to support your lifestyle and meet your retirement goals, then you may be able to live on your 401(k). Working with a financial advisor to determine a suitable retirement strategy will help reduce stress and anxiety associated with retirement.
How much should I save to retire the way I would love to?
A good rule of thumb for most families is that they are looking to replace their pre-retirement income in retirement. Working with a financial advisor will help show you how to make that possible. There is no limit on how much you can save to have a comfortable retirement. How much you save depends on your retirement goals and needs. However, the standard rate is 10% to 15% of your yearly income.
I left my current job, now what?
If you leave your current job, you can either rollover your 401(k) to an IRA, leave the plan with your former employer, rollover to a new employer's 401(k) plan, or cash it out. You can complete an IRA rollover if you have left your current job and have not found another.