Its common for employees to contribute to their employer sponsored retirement plan, such as a 401(k). Leaving a place of employment can be intimidating, and it can be increasingly intimidating when your retirement savings are tied into the company’s retirement plan. There are several ways to handle your 401(k) from a previous employer.
There is sometimes the option to leave your 401(k) with your previous employer. While the taxes are still deferred, there are some downsides to this decision with one of the biggest being the previous employee can no longer contribute to the 401(k). The investments stay the same along with the fee and services.
Transfer to New Employer’s 401(k) If your new employer has a 401(k) established for their company, you have the option to transfer your assets to that plan. Before transferring, be sure to compare your current plan to your new one. There are factors such as fees and investment choices that can cause differences between the plans, so be sure to do some research or seek the advice of a financial advisor to determine which plan is best for you.
Roll into an IRA If your new employer does not offer a retirement plan, an IRA may be a safe option for you. If you roll your funds into a Traditional IRA, your earnings are still tax-deferred however you will pay taxes on distributions. With an IRA, the participant must reach the age of 59 ½ to withdraw funds without being penalized. Participants are also required to begin taking their required minimum distribution (RMD) at the age of 70 ½. One difference between IRAs and 401(k)s is the ability to take a loan out against your account. While loans are allowed to e taken against a 401(k), this is not the case for IRAs.
Fortunately, you are not required to stay in the old plan and have the option to cash out! While this may be an appealing idea to some, cashing out your 401(k) can have serious implications if you are not careful. If the employee is not at or above the age of 55 when they decide to cash out, there will be a 10% penalty. There is also an additional 20% that is automatically taken for taxes when the account is closed. Considering the major tax implications of cashing out, cashing out may not be the best option.
It can be scary to leave a job, especially when your employer sponsored retirement plan is established. While there are several options as to how to handle your old 401(k), it is always a good idea to discuss the options with your financial advisor prior to making any decisions.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment Advice offered through GWM Advisors, a registered investment advisor. GWM Advisors, Southern Point Investment Partners, and Fidelity Investments are separate entities from LPL Financial.