One of best ways to save for retirement is saving into your companies’ 401k. This is great, until you leave that company, what happens to your money?
Well, not to worry, fortunately it’s still right where you left it. It’s like finding that $20 in a pair of pants that you completely forgot about, although hopefully you have more than that in your 401k!
So how can you get the money out? Most people don’t understand that there are rules and penalties if you don’t do it correctly. Hopefully this will help you get things under control:
1. Roll the your old 401(k) money into your current employer’s plan
Not without its problems, but it does open the door for getting your 401(k) money into one place. This way you don’t forget about your old 401(k) that you didn’t know your employer was contributing money for you.
The downside is that not all employers will let you do this. Each employer can set up specific rules within the 401(k) plan, making this option your employer’s discretion whether its allowed. Another downside is if you don’t really like the investment options provided by your current employer.
2. You could leave it where it is
If you really like your investment options you may want to leave your 401(k) where it is.
This to me, is like forgetting to take the money from your original childhood bank account. Why would you just leave it sitting in the bank account? If you leave your 401(k), you give up most if not all of the features of the 401(k), such as taking out a loan or adjusting the investment options.
3. Roll the assets into an IRA
Within a 401(k) are only a select amount of investments to choose from, your employer with some help selected those investment options.
If you choose to roll the money into an IRA, you will have just opened up those investment options to countless options depending on where you have your money. It’s like going to Baskin Robins and realizing there are other flavors than just Vanilla, Strawberry and Chocolate.
The hard part about having tons of options can be analysis paralysis. If you aren’t sure how to navigate your own investments or even the idea of selecting what is right you may have issues picking investments yourself. There may also be different cost structure for better or worse than leaving your money in your 401(k).
4. Simply, taking out the money
You do have the option to take out the money from your old 401(k). Although this would be a last resort, given if you are under 59.5 you would be penalized 10%, and the money you take out would be subject to ordinary income taxes. You also would be reducing your retirement savings, as a 401(k) is designed for retirement!
Whatever option you choose, just knowing you have options hopefully helps find someone to help you make a decision. Why not ask me during our free 30 minute strategy session?
Disclosure: If you are considering rolling over money from an employer-sponsored plan, such as a 401(k) or 403(b), you may have the option of leaving the money in the current employer-sponsored plan or moving it into a new employer-sponsored plan. Benefits of leaving money in an employer-sponsored plan may include: access to lower cost institutional class shares; access to investment planning tools and other educational materials; the potential for penalty-free withdrawals starting at age 55; broader protection from creditors and legal judgments; and the ability to postpone required minimum distributions beyond age 70 ½, under certain circumstances.
If your employer-sponsored plan account holds significantly appreciated employer stock, you should carefully consider the negative tax implications of transferring the stock to an IRA against the risk of being overly concentrated in employer stock. You should also understand that Commonwealth and your financial advisor may earn commissions or advisory fees as a result of a rollover that may not otherwise be earned if you leave your plan assets in your old or a new employer-sponsored plan and that there may be account transfer, opening and/or closing fees associated with a rollover.
This list of considerations is not exhaustive. Your decision whether or not to rollover your assets from an employer-sponsored plan into an IRA should be discussed with your financial advisor and your tax professional.