Retirement is a lifelong investment that ideally begins at the start of your career. The Balance reports today; the average person changes jobs ten to fifteen times (with an average of job changes) during his or her career. A survey by Deloitte also found that two-thirds of millennials plan to leave their company in five years or less. Whether you’re looking for greater fulfillment or more compensation, you want to make sure your retirement plan takes the move with you. Since you can’t just throw your retirement plan in a brown box like you can with your desk supplies, it’s important to know how you can move your 401(k). Typically, you have three options that all come with pros and cons: You can leave your 401k plan with your former employer, roll over your account into an individual retirement account (IRA) or transfer your old 401(k) into your new company’s plan.
If you are making a job change soon, here’s some insight on what you can do with your 401(k):
Have you borrowed from yourself?
Changing jobs is very exciting, but you need to make sure you deal with your outstanding loan if you borrowed money from your retirement plan. If you’ve borrowed any money from your 401(k), you need to pay it in full before leaving the company. Typically the loan balance is due within 60 days from the day you leave your company, whether you are terminated or got a new job. If you fail to repay the loan and you are under the age of 59.5 the amount owed will become an early withdrawal which can add an additional 10 percent tax penalty and or additional fees if you are under the age of 59.5.
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The IRS will treat the loan as an early withdrawal from your 401(k) retirement plan. If you fail to pay back the loan within the fixed period, it may become a very costly decision. Luckily, if your loan becomes a tax liability, employers do not report defaults to the credit bureaus, so your credit score will not be affected. However, you should still avoid borrowing from your nest egg, being that most won’t be able to pay back the amount borrowed within the 60-day window. Be sure to check with your HR department before you leave to find out what the rules are on 401 (k) loans when an employee leaves the company.
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Leaving Your 401(k) with Your Former Employer
While this may be convenient, leaving your monies at your old company’s plan limits your investment choices. This is usually an option when you have a certain balance amount; typically $5,000. Most companies will permit you to keep your retirement savings in their plans after you leave your company. If your balance is less than $1,000, your employer may close your account and send you a check for the balance. While procrastination may be the main reason 401(k)s are left at your old company, you may want to stick with leaving your 401(k) at your old company until you are ready to make an informed decision. Depending upon your plan, some plans limit the number of transactions, assess extra service fees or restrict beneficiary options for terminated employees. Leaving your money in a 401(k) does offer ultimate creditor protection. Federal law prohibits creditors from ceasing 401(k) accounts.
Roll Your 401(k) over into an IRA
You may want to consider rolling your 401(K) into an IRA. Majority of people roll their money over to an IRA because it offers more investment options. For some, having the opportunity to pick and choose any variety of funds is important to them. If you contribute to your employer’s retirement plan, you may end up with lesser options chosen by the plan administrator. You can also rollover other 401(k) accounts you have with other employers into one IRA, making it easier to track your money.
Some may be hesitant to roll over, due to the fear of extra taxes. If you roll over your employer-sponsored plan efficiently, there should be no tax consequences of moving your funds into an IRA. With regards to taxes when rolling over, you should look to use a direct rollover method to prevent tax consequences. Also, a rollover from a traditional 401(k) should enter a traditional IRA. A rollover from a Roth (401(l should result in a Roth IRA. Additionally, if you roll over from a traditional retirement plan into a Roth IRA, you will have to pay income taxes on the money. When deciding if you should roll over to an IRA you may want to consider your personal situation and preferences. It’s important to note that with an IRA, you can get back on track with your retirement savings months before you are eligible for a new employer’s 401(k).
Roll Over 401(k) into Your New Employer’s Plan
This can be a great option, being that you join a company that allows you to participate in their 401(k) right away. Seek out if your new employer has a defined contribution plan that allows rollovers from other plans. Reiterating, you will be limited regarding investment choices, but a big benefit is credit protection. If you have the option, you may want to do a direct, trustee-to-trustee, transfer from your old retirement plan to your new employer’s plan. Transferring your old 401(k) currencies to your new plan may make it easier to track your retirement savings.
The world of retirement planning is not always so straightforward. Research all the details of your current account and consult tax professional and other advisors with any questions to avoid costly mistakes.
Dr. Victoria Bateman, an esteemed economist best known for her nude protests for gender equality, uses her body as a form of art that serves to challenge the stigma around women's bodies and women's rights, in the world of economics. In March 2018, Bateman attended the annual conference of the Royal Economic Society in Brighton stark naked with the word "respect" written across her chest and stomach. Unbashful in delivering her message, Bateman was determined to start a conversation.