Retirement is a thorny issue for millions of Americans today. The changing economic climate in the United States, from the effects of the Great Recession and shrinking Social Security funds to the decline of employer-funded programs, creates a lot of anxiety for many in the workforce. If you're lucky enough to have a 401k at the moment, you're probably afraid to change jobs for fear of losing some of your money or are just unsure how to proceed. Below you'll find helpful tips to aid you in navigating this confusing topic.
Don't Cash Out the Fund
The easiest option in the mind of most people is to simply cash out the fund and take it with you to a new job. This decision is a poor move from a financial standpoint because it will cost you money and shrink your overall retirement funds. All 401k withdrawals before the age of 59½ are subject to income tax and a 10% early withdrawal penalty. For example, if you are in the 25% tax bracket and withdraw $10,000 from a 401k when changing jobs, you're only going to get $6,500 of that money after Uncle Sam dips his fingers in the jar.
Roll Over to a New Financial Institution
If you happen to join a new employer with 401k offered to the workforce or select to put it into an individual fund of your own, you can setup an electronic transfer of funds to automatically roll your funds from your current 401k to the new sponsored 401k or other retirement account. If you take possession of the funds yourself to deposit, be sure to do so quickly. You have 60 days to establish a new fund and put your 401k money into that account before you pay the income tax on the money, and if you're 59½ or younger you'll face the double whammy of paying the early withdrawal fee as well.
Establish an Individual Retirement Account (IRA)
Whether you're changing jobs or not (for the purposes of this piece, you are), 401k accounts tend to have a more limited array of investment options than IRA accounts. On top of that, 401k accounts also have higher fees on average. If you roll your current 401k over into a new IRA account instead, you have the flexibility to choose from low-cost funds and save on service fees in the process. Additionally, you won't have to worry again in the future about moving 401k funds around when/if you change jobs.
Leave the Money Where it is
As long as you have at least $5,000 in your 401k account with your current employer, you have the legal right to simply leave that cash in that account. While you consider changing jobs or after you have already changed jobs, you have a 30 to 90 day window of time to contemplate the future of your current 401k plan. This is the easiest option out there for handling your funds because you don't have to do anything.
Talk to Your Financial Advisor
If you're spending money each year on a financial advisor for other matters in your life, take the time to talk with them about the move that is best for your situation. Your financial advisor has an intimate knowledge of your financial health and the climate of the economy now, as well as in the near future. As such, your advisor can help you decide which course of action is the best to take without negatively impacting your plans for retirement.
Don’t lose any of your retirement fund value during the transition between jobs. Whether you do it yourself, or solicit the help of a professional, your 401k plan can stay intact and continue growth even when you change jobs. Ask a financial advisor for a recommended course of action and keep your eye on the future. Contact Manhattan Ridge today for more information or help with your retirement.