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Switching Jobs and Your 401(k)

Ready to quit your present job and grab an exciting offer from a top-notch company? Great! You’re all set to make a fresh start in your career. But what will you do with your old 401K account? You need to make a smart decision, let’s look at your options:

1. Withdraw all the money from your account

2. Leave the account with your soon to be ex-employer

3. Roll over your account into an IRA

4. Roll over whatever you have saved to your new employer’s retirement plan

Which one costs the most? 

The first option is the costliest and there is a lot at stake.

1. This is the costliest option since you’ll have to pay income taxes on the full amount withdrawn from your 401(k) account balance.

2. You’ll need to pay income taxes federally and possibly at the state level depending on where you live.

3. If you are younger than 50 ½, you will be subject to an additional 10% early withdrawal penalty by the IRS.Untitled design (14)

What if you leave the plan with your ex-employer? 

This is not a preferred option because of the following reasons:

1. You can’t make new contributions to this account in the future.

2. There are additional fees associated with retirement plans that you may be paying for, such as record keeping and plan administration.

3. You won’t be able to borrow money from this account.

4. The plan sponsor can force you to withdraw funds from the account if you have less than $1,000 in the plan. If you have between $1,000 and $5,000 the plan sponsor can force you to rollover the funds to an IRA.

What if you roll over your savings into an IRA?

In this case, you have three options:

1. Roll over your assets from a traditional 401(k) account to a traditional IRA

2. Roll over your assets from a Roth 401(k) to a Roth IRA

3. Roll over your assets from a traditional 401(k) to an IRA and convert it to a Roth IRA

First option

1. Complete the forms for both a traditional 401(k) account and an IRA account.

2. Transfer the money electronically or by check.

3. You do not have to pay taxes on the amount you roll over.

4. Your new earning is tax deferred.

Second option

1. You can do this with a custodian of your choice.

2. You can transfer the money electronically or by check.

3. You need to fill out forms for a 401(k) account and a Roth IRA.

4. You don’t have to pay tax on the amount you roll over.

5. Your new earning is tax deferred.

6. You can qualify for a tax-free withdrawal once the account is five years old and you’re 59 ½ years of age (or older).

Third option

1. You can select this option when your traditional 401(k) plan allows direct rollover to a Roth IRA.

2. You need to pay tax on the amount you roll over.

What if you roll over your assets into your new employer’s plan? 

It is a good decision to roll over your assets into one 401K account since you can track everything. But there are a few details you need to check before making the final decision.

1. How much do you need to pay in fees?

2. How many investment options will you get?

3. Are you getting your preferred investment options?

4. How long will it take to move your assets?

Steps to take before rolling over your assets:

1. Have a talk with the new plan administrator

2. Decide the types of investments you want to make

3. Fill out the required forms (if needed)

4. Request your previous plan administrator to electronically transfer the money into the new planUntitled design (15)

Bottom line 

Think carefully and do your homework before making the final decision since it will directly affect the golden years of your life. If you have any doubts, have a talk with a financial adviser before choosing any option.

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