Navigating Your 401(k) Choices: To Roll Over or Not?

4/18/2024

Are you at a crossroads with your 401(k) as you switch jobs? The decision to roll over or leave your retirement savings with your previous employer isn't one to take lightly. Here are the options and factors to consider, so you can make an informed choice.

Keeping Your Retirement Savings Plan Where It Is

If your former employer's 401(k) plan allows it and you're satisfied with its investment options, leaving your funds where they are might seem convenient. However, convenience shouldn't overshadow caution. Each year, billions of dollars in retirement savings get lost due to neglect. It's crucial to keep a close eye on your account, regularly review your investments in the broader context of your portfolio, and ensure your beneficiaries are up to date.

Your options might be determined based on the balance in your account.  Balances below $5,000 might necessitate transfer, and balances under $1,000 might prompt your former employer to issue a check. In such cases, depositing the check into your new employer's 401(k) or an IRA within 60 days is imperative to avoid taxes and early withdrawal penalties.

Transferring to Your New Employer's Plan

Transferring your old 401(k) to your new employer's qualified retirement plan is another viable option. The new plan might offer lower fees or investment options better aligned with your financial objectives. Consolidating your retirement savings can also streamline tracking ensuring that you don’t ‘lose’ any 401(k) funds as you change jobs.

Opting for a direct 401(k) rollover enables tax- and penalty-free transfer of funds to your new employer's plan. You can then collaborate with the plan administrator to allocate savings into new investment options. Failure to adhere to 401(k) transfer regulations may lead to additional penalties and taxes. For instance, receiving funds in the form of a check without a direct rollover triggers a mandatory 20% withholding.

Rolling Over to an IRA

Opting for an IRA rollover affords access to a broader range of investment options and potentially lower fees. Taking control of your retirement savings can be empowering compared to being a participant in an employer's plan. There are annual contribution limits for IRA accounts, however, rollovers don't count towards these IRA limits, offering flexibility for larger sums.

With a traditional IRA rollover there are no immediate taxes due upon moving funds, with taxes only payable upon withdrawal.  Roth conversions from a 401(k) are taxed as income, necessitating careful planning to mitigate tax implications, but subsequent earnings will grow tax-free.

Cashing Out Your 401(k)

Cashing out might seem appealing for immediate cash flow, but it comes with substantial tax implications and forfeits potential growth. Early withdrawal penalties apply if you're under 59 ½, making it a less favorable choice for long-term financial health. Seek financial advice if you are considering this option.

How to find a ‘lost’ 401(k)

If you’ve switched jobs and forgotten to transfer your 401(k) and then lost track of it, there are ways to seek it out and roll it over into your other funds.  Every fund, no matter how small will grow over time. It is worth the time to track down your missing 401(k) accounts.

Start by searching for old account statements, either hard copies that were mailed to you, or search through your emails for electronic copies. If you don’t have any luck finding an old statement, consider contacting your old employer for more information.  Once you have the account details you can continue the process of rolling over the funds into an active account.

If you still aren’t able to find your old account, try contacting the National Registry of Unclaimed Retirement Benefits for assistance.

Deciding the fate of your 401(k) demands careful consideration of your financial goals, investment preferences, and tax implications. Consulting a financial advisor can provide invaluable insights tailored to your specific circumstances, guiding you toward a decision aligned with your retirement objectives.

Remember, your retirement savings are the cornerstone of your financial security in the future. Take the time to weigh your options and make a well-informed decision that paves the way for a comfortable retirement journey.

 

 

 

 

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