I’m Changing Jobs: What Should I Do With My 401K

It is no secret that American businesses are suffering.  In 2008, a large number of businesses closed their doors.  It appears this practice will continue for years.  Americans who have yet to lose their jobs are concerned about the future.  Some are worried about job security, lay-offs, downsizing and others are asked to take a pay cut.

If you are in this situation, it may leave you worried about the future.  You may opt to find a more stable job with a different company. What if you have a 401(k) plan with your current employer? What should you do?  What are your options?

Cash Out.  This option is rapidly increasing in popularity.  One of the reasons is the poor economy. Businesses that do stay afloat are passing on the added expenses to consumers.  You may have seen your utility, grocery, and insurance bills increase.  Some Americans must trim their budgets and cut corners.  When switching jobs, cashing out your 401(k) may sound like the best plan.  Is it really?

You, like many others, love the sound of having money in your pocket.  You can pay off your bills, put that money towards a new home, and so forth.  With that said, remember the point of a 401(k). It is to save money towards retirement.  There is a lot of concern about Social Security and pensions. In the past, 401(k) plans were considered supplemental plans.  Now, they are the main source of income for many during their golden years.

As nice as it is to have money in your pocket, look at the cons of early withdrawal because there are many.  For starters, you are charged a 10% early cash out fee.  Next, there is the tax factor.  Money invested in a 401(k) is taxable when withdrawn.  Combine those taxes with the 10% penalty and you may not have much left.

Those who do cash out their 401(k) plans are usually in their 20s or 30s. They believe they have years to continue saving for retirement, and they have time to recover.  Yes, this is true, but money is lost.  There is a better alternative.  What is it?

Do a 401(k) Rollover.  This option is not right for everyone.  To quality for a rollover, you must have a new job before leaving your current one.  With today’s economy, this presents many risks.  What if you don’t find a new job, but your current employer hears you are looking.  What if they decide, themselves, to cut the strings first?

If you are able to secure a new job before leaving your current employer, there are a number of benefits to rolling over your 401(k).  You continue to earn money, contribute to the account, and do not have to pay taxes.  First, experts recommended reviewing your new employer’s 401(k) plan.  Do they match your payroll deductions or give you enough investment options?  If not, you have two alternatives. What are they?

Rollover your 401(k) to an IRA.  An IRA is similar to a 401(k) plan in that it is a retirement savings plan.  The amount you contribute depends on your income level.  As with a 401(k), some IRAs have tax benefits.  However, there are usually more rules and restrictions.  Employees are able to contribute to both 401(k) and IRA accounts.  If you want to contribute to both and financially can, do more than just rollover your 401(k), but capitalize on both.

Leave your assets in your former employer’s 401(k) plan.  This option has many risks, but it is a better alternative than cashing out.  If nearing retirement, you do not want to lose or suffer penalties from the money you saved, invested, and made.  That is why cashing out for an early retirement is not recommended, unless you have a solid financial plan in place.

Most employers enable former employees to keep their assets invested.  Unfortunately, the risks are centered on fees.  Your former employer can charge you fees for record keeping, management, and more. Overtime, these can significantly decrease your retirement savings.

As you can see, you have a number of options with your 401(k) when looking to change jobs.  If you are nearing retirement, it may be easier to stay with your current employer.  In as little as 5 years, you may be able to retire.  If not, your best options are to rollover your 401(k) to your new employer or to an IRA account.

For a FREE Consultation regarding retirement decisions, our list of recommended financial advisors, and some important tips, tricks and strategies that can make the difference between you retiring comfortably, or retiring broke, contact us today or visit http://blackandretired.com/free-consultation/

Tagged under:

Leave a Reply

Your email address will not be published.