|Long gone are the days of the 30 year company careers, gone with that are the large pensions that have so severely strapped our economy. The average worker according to the Bureau of labor statistics is just shy of 12 job changes throughout ages 18- 48! Instead we must rely on our own savings. Bring on the 401k!The 401k was never meant to completely cover your retirement. It was meant to supplement social security along with a company pension. But with so many workers now changing jobs frequently the question that often gets brought up is should you leave your 401k at your old employer?
You have at one point heard or been told about a 401k, but let’s start with what is a 401k? It is a way for you to contribute your earnings into a tax deferred retirement vehicle. Think of it as a way to stash your cash away, without being taxed on it now. But there also lies a problem. Every time you change jobs you have a different 401k. So how is it that you can keep all this stuff straight?
Even if you didn’t contribute to your own 401k, there may be money that was contributed by your employer. This is known as an employer discretionary contribution. Don’t be shy to call your old employer and double check to see if you may have money hanging out in an old employer 401k!
Although it may seem like “why bother it if I haven’t really paid attention to it in the last xx years,” it is still fruitful to be on top of your money. Remember this is your money for your retirement. It’s the spring cleaning moment. We all know we should clean that one closet at least once a year because we will be better off for it, yet we can never commit to do it, because we don’t see the real value in doing it.
Your old employer may have some nice options, but here are things to consider when deciding whether to leave your 401k or Roll it out:
Especially true in larger companies, the options are very generic and may not provide a lot of flexibility to invest your money into different sectors or asset categories, including real estate. You may be restricted to invest in only a handful of funds, say 5-10. (Which by and large is not a whole lot.) By rolling out your 401k you can go directly into an IRA with thousands of options to choose from. You could invest in stocks, bonds, mutual funds, ETFs and any other potential alternative asset.
Ease of use:
How easy is it to access your account? How easy is it to make investment adjustments or changes? Note you will not be able to contribute to this old account either, since you are no longer employed by them. This will possibly make it hard to access your money when it comes times to use it in retirement. By rolling into an IRA you could still make contributions as long as meet certain earning requirements.
Even if you feel good about where your money is invested and how you are managing it, then you are not required to roll out your money. Some plans may have it written in their plan agreement though that any account under $5,000 and no longer employed must roll out the funds. This would mean your employer automatically rolling out the money to you.
Just keep in mind no one manages your 401k but you. One of the biggest mistakes I often hear is that clients think they have someone who actively manages their 401k. This is simply not true. 401ks are managed by participants which is you.
So what do you do if you are rolling out old 401k money into an IRA?
Decide if you are going to use an advisor or go it alone. If you go it alone find a company you like and open an IRA. You then have 60 days to get the 401k funds into the IRA (once the 401k is rolled out), otherwise the IRS will think it’s a distribution and if you are under age 59.5 you get hit with a 10% penalty and it counts as ordinary income. Otherwise find a great advisor to work with and get some help.
In all things be aware of your options there is no one size fits all in financial planning, each of us has different needs, and different strategies to meet those needs.