Did you just switch jobs? If so, this is probably a busy and exciting time. You have to adjust to your new company and role and possibly change your daily routine. You might have even accepted a job in a new part of the country or in a brand-new industry. Switching jobs can be stressful and chaotic, but it’s also a common part of today’s economy.
One thing you may have forgotten during the transition is to make a decision about your 401(k) at your old company. Your balance likely includes your contributions, investment growth and possibly even vested employer contributions.
Of course, there’s nothing saying you have to do anything with it. In many plans, you have the ability to keep funds in the plan even if you’re no longer an employee. However, as you switch jobs throughout your career, it may become difficult to keep track of a trail of old 401(k) balances.
What should you do? There’s no solution that is right for everyone. You have a few options available. Review the choices below and compare them with your own needs and goals.
One option you always have is to withdraw the funds from the plan and simply take the distribution as cash. That may be a tempting option. After all, you could have a significant amount of money as a lump sum.
However, there are a couple of reasons you might not want to do that. The first is taxes. A 401(k) plan is tax-deferred, meaning you don’t pay taxes on earnings in the plan until you take a distribution. If you withdraw the funds from your plan, you have to pay taxes on all of your growth in the current year. That could be a significant tax bill, and it could even push you into a higher bracket.
Also, if you’re under age 59½ you may have to pay an early distribution penalty. Your 401(k) plan is designed specifically for retirement. Funds taken before 59½ are considered pre-retirement distributions, meaning they’re not allowed under the plan’s tax rules. That penalty is usually assessed on your tax return for the current year.
A full distribution from your plan may be tempting because it puts cash in your pocket. However, it can also create a significant amount of taxes and penalties.
Roll it into the 401(k) plan at your new job.
If your new employer offers a 401(k) plan, you may have the option to simply roll the balance from the old plan over to the new one. Doing this allows you to avoid the taxes and penalties, because it’s not technically a distribution. The money never hits your hands or your bank account. Rather, it goes straight from the old plan administrator to the new one.
The benefit of doing this is mainly simplicity. You keep everything in one 401(k) account, which may be helpful for management and tracking. Your plan administrator or human resources department at your new employer should be able to help you with this.
Roll it into an IRA.
Finally, you can also roll your balance into an IRA. Again, the funds are transferred directly from the old 401(k) to your IRA custodian. Since an IRA has the same tax treatment as a 401(k), you avoid all penalties and taxes in the process.
There are several benefits to rolling 401(k) funds into an IRA. One is that you may have more investment options in the IRA plan than in your 401(k). Another is that the IRA isn’t tied to your job, so if you switch employers again, you won’t have to address these funds. You can even roll additional 401(k) plans into the same IRA as you make job changes in the future.
Not sure what to do with your old 401(k)? Let’s discuss it. Contact us at Gregory Financial. We can analyze your needs and objectives and make a recommendation so you can make an informed decision. Let’s connect today.
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