Determine If You Have Received The Entire Match You Are Owed
If employers match contributions, they usually deposit their portion right away. However, sometimes your contribution rate exceeds the limit they can match per paycheck. This may happen if you frontload your account at the beginning of the year, or increase your match to catch up towards the end. On an annual basis, you employer will reconcile the difference with a true up contribution. Find out whether your employers total match has been deposited, or if you need to wait.
Keep in mind that you may be charged a fee to close your 401 account. This is important if you think you are entitled to a true up contribution. If so, wait until the contribution is posted before initiating a rollover, transfer or distribution. Otherwise, the true up contribution will re-open your account and youll find yourself paying a second closing fee and doing twice the paperwork.
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Leaving one job for another is a big decision, and shouldnt be taken lightly. Be sure that you not only factor in your 401 and employer match when weighing your options, but determine if youre leaving before taking advantage of all benefits due to you. If nothing else, learn from my mistake: make sure that youre not resigning a mere day sooner than you should, leaving thousands of dollars in employer contributions on the table.
Im still kicking myself in the butt for that one.
Roll The Money Into An Individual Retirement Account
Another option is to open what is known as a rollover IRA, a retirement account that exists to consolidate other retirement accounts in one place. Its like a basket into which you can throw all of your old 401s. Money moved into a rollover IRA remains tax-deferred for retirement, and you can invest it in any way you choose.
You can only complete one IRA rollover in a one-year period, per IRS regulations.
Within a rollover IRA, savers have access to countless investment options, including stocks, bonds, mutual funds, and real estate investment trusts. If that sounds overwhelming, you could instead opt for a lifecycle fund that chooses investments for you according to your target retirement date.
Leave Your Money With Your Former Employer
For some people, the most plausible option is to leave their investment with their former employer. This option allows you to continue making investments with the money even if you are not working with that employer. In most cases, old employers allow you to leave your investment if you have more than $5,000 in your 401 retirement savings account. If your account holds less than this amount, your previous employer may decide to cash out your plan and send you a check for the balance.
The advantage of this option is that it allows you to leave your 401 with your former employer if they offer good terms. Leaving your retirement account with your previous employer allows you to wait for registration to open with your new employer.
When you leave your 401 savings with your former employer, your access to your money can be limited. Some employers can levy huge maintenance fees, implement restrictions on investment choices and prevent access to your savings until you reach retirement age. Unless you’re about to retire and you know you won’t change jobs often, avoid leaving your 401 with your former employer.
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Find Out If Your 401 Plan Charges Maintenance Fees
Some plans, particularly small business plans, charge annual management fees. If your current 401 is charging you a flat fee for administration, you may want to consider alternative options that dont have this added expense.
However, a small expense may be worth paying to make sure your 401 is properly managed. For instance, blooom is a robo-advisor for 401 accounts. With blooom, you can get a free analysis of your retirement plan and for $120 per year, blooom will manage your 401. This includes regularly adjusting your portfolio, expert financial help from blooom advisors and suspicious activity alerts to protect your account. blooom even finds hidden fees that you may not know youre paying for. Blooom works with any employer sponsored retirement plan and is currently the only robo-advisor available that specifically manages 401 accounts.
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You could also decide to roll the money to your new companys plan or to roll the money into an IRA. Its a good idea to evaluate a variety of factors and consult a specialist before acting.
Fees will be published on your 401 statements and in plan documents. Or, consult with your benefits department to help you locate the information.
Rolling Into An Ira Stay On Top Of The Move
If you decide to roll over your 401 into an IRA not sponsored by your new employer, your IRA sponsor or advisor will help guide you through the process to ensure the money gets to the proper destination in a timely manner.
Be sure your new broker/advisor has experience with rollovers, especially if you have company stock in your 401. Why? Because company stock is liquidated when its rolled into an IRA, and later, when distributed, may be taxed as ordinary income resulting in a higher tax liability.
As recommended above, stay vigilant until your money is safely in its new home and that you have proof typically verified online through the IRA providers website.
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Option : Cash Out Your Old 401
Another option is cashing out your 401, which does exactly what you would expect provides cash. But there are many implications to consider. The cash you withdraw is considered income, and you may incur local, state and federal taxes by doing so. You will lose the benefit of giving your accounts investments time to grow, and you may need to work longer to make up the difference. Whats more, if you leave your employer prior to the year you turn 55 and are younger than 59 ½, you will be required to pay a 10% early withdrawal penalty on top of any taxes on the money.
Cash Out Your Old Account
Think long and hard before you do this. Its almost never the best choiceand it triggers a big tax bill!
Advantage
- Its money you can use to pay bills or for another purpose. Also, if you left your job during or after the calendar year in which you turned 55, you wont owe an early-withdrawal penalty.
Disadvantages
- Youll owe income taxes on your money. If you’re in a 30% combined federal and state tax bracket, for example, and cash out a $50,000 account, you’ll have only $35,000 left after taxes.
- You will destroy your retirement nest egg.
The bottom line: For most people, the best option is to move your savings into an IRA, which gives you the most freedom and control over your money.
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Rollover To A Traditional Ira
If you have not secured employment with another company, or if you decide to go into business for yourself instead of looking for another job, you may roll the funds in your 401 account into a traditional IRA without incurring taxes or penalties. These funds include earnings from your contributions as well as any vested contributions from your previous employer. You can then contribute to your traditional IRA as you would to a 401 plan.
The advantage of rolling the funds over is the continuity of the tax-deferred accruing of money for retirement even if you can’t contribute to it.
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Roll It Over Into Your New Employer’s Plan
You’ll have to double check with your new employer to make sure they accept rollovers from a previous job. But if you get the go ahead to do this, you’d be able to just manage one 401 account rather than two different accounts potentially from two different plan providers .
“Some people find that having just one 401 account makes it easier to see all their money in one place,” MacDonald explained.
The money will still have the chance to grow in your new employer’s plan just make sure you like the new investment options available to you. And you’ll be able to save on all the additional costs that come with just keeping your balance with your old employer.
And unlike with the IRA rollover option, you won’t have to take required minimum distributions at age 72 if you move the money into your new employer’s 401 plan.
“Ultimately, it comes down to convenience,” MacDonald said. “And if you like seeing all of your assets in one place then this option could make sense.”
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Calculate The Total Amount Your Current Employer Has Contributed To Your 401
If your retirement plan offers a matching benefit, it means that your employer contributes money towards your 401 account based on specific rules documented in your plan.
Occasionally, employers will contribute a percentage of your salary regardless of whether you contribute yourself. Other plans dictate that an employer match dollar-for-dollar up to a percentage of your salary. Some may match 50 cents on the dollar for the first 3% up to 6% of your salary. The bottom line? Every plan is different.
In order to determine your benefit, you should review your plan document or consult with your benefits department. The total dollar amount contributed by your employers is on your 401 statement. If you dont have a recent copy or an online account, contact your plans customer service department or your companys benefits department for help.
It can be easy to forget, though, when contemplating a new job . The value of matched contributions is a great benefit that should be included when you calculate your salary and employment package.
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Roll Your Money Into Your New Employer’s 401 Plan
Almost all 401 plans now accept rollovers from other retirement plans. You should certainly contribute to your new plan. But should you transfer your old account into it?
Advantages
- Consolidating your retirement money makes it easier to manage. When you’ve left a retirement account at a company you no longer work for, you may pay less attention to its performance or downplay its importance in your overall asset allocation.
- The new plan may offer more attractive investment options than the old one, as well as additional services, such as financial-planning advice.
Disadvantages
- The new plan may offer fewer investment options or investments that dont meet your needs.
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What To Do With Your 401 When You Quit Your Job
One of the commonly overlooked aspects of changing jobs is deciding what to do with your 401 tied to your previous employer when you leave. Its understandablewhen youre bursting with all the energy and excitement that comes with tackling new challenges at a new job, figuring out what to do with your old 401 will probably be the last thing on your mind.
But that doesnt mean its not important. What you decide to do with your old 401 when you leave your job can potentially net you thousands of dollars in avoided fees and stronger investment returns over the long term depending on which path you ultimately decide to take. And when were talking about that kind of money, it pays to understand what your options are and the consequences of each.
In this article, were going to dive deep into the four primary options you have at your disposal when you decide to leave your company for whatever reasoneither voluntarily or involuntarily . By the end of it, you should have a solid understanding of the pros and cons of each and a pretty clear idea of which direction you should take based on your own unique financial situation.
I do need to point out that before making any significant financial decisions, you should consult a professional who can guide you through the process and help you better understand the implications of your decisions.
Roll It Over To Your New Employer
If youve switched jobs, see if your new employer offers a 401 and when you are eligible to participate. Many employers require new employees to put in a certain number of days of service before they can enroll in a retirement savings plan.
Once you are enrolled in a plan with your new employer, its simple to roll over your old 401. You can elect to have the administrator of the old plan deposit the contents of your account directly into the new plan by simply filling out some paperwork. This is called a direct transfer, made from custodian to custodian, and it saves you any risk of owing taxes or missing a deadline.
Alternatively, you can elect to have the balance of your old account distributed to you in the form of a check. However, you must deposit the funds into your new 401 within 60 days to avoid paying income tax on the entire balance. Make sure your new 401 account is active and ready to receive contributions before you liquidate your old account.
Consolidating old 401 accounts into a current employers 401 program makes sense if your current employers 401 is well structured and cost-effective, and it gives you one less thing to keep track of, says Stephen J. Taddie, managing partner, Stellar Capital Management LLC, Phoenix, Arizona. Keeping things simple for you now also makes things simple for your heirs should they need to step in to take care of your affairs later.
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Plan Your Retirement With Your 401 K
If you haven’t already, it’s crucial that you start to plan your retirement as soon as possible. Financial security is a vital part of having a healthy and happy retirement. The aim of having a 401 k in the first place is that it gives you freedom from work and acts as a nest egg. You might be working hard now, but you want to be able to truly enjoy your golden years. Having the proper retirement plans in place is the easiest way to ensure this. If you start planning to retire well before the time comes, you should be in a very strong position financially.
Take the time to come up with plans for your retirement while you still have a job. These plans don’t have to be concrete. All you have to do is get an idea of how your retirement may look financially. Then you can plan distributions from your 401 k, as well as any investments you may want to investigate.
Option : Do A Rollover To An Ira And Take Control Of It
An IRA is an account you can set up on your own as opposed to a 401 which is sponsored by your employer. As noted above, you can rollover your 401 to an IRA once you leave your employer. If you decide to pursue this route, you can opt to rollover your funds to either a traditional IRA or Roth IRA.
If your contributions to your 401 were pre-tax, rolling over to a traditional IRA may be the simpler and preferred option because it will have no tax consequences. Your assets will continue to grow tax-deferred and be taxed on the distributions when you retire. See tax details further down in the article. Traditional 401s and IRAs also have Required Minimum Distributions when you reach 70 ½.
Another option is to rollover to a Roth IRA. If you opted for a Roth 401, again this will have no tax consequence except for any employer match amount, which is always pre-tax. But if you opted for a pre-tax 401, rolling into a Roth IRA will cause a large tax consequence – youll owe immediate tax on the contributions and growth. The main advantage of a Roth IRA is that you wont have to pay taxes on qualified distributions when you retire because the funds have already been taxed and grow tax-free. Sometimes it makes sense to rollover to a Roth IRA in a year when you have a low income because the potential gain in tax-free growth on the assets may be greater than the one-time tax hit.
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Things You Can Do With 401 After Leaving Your Job
Many employers offer 401s as a way to help employees save for retirement. When you leave your job, you’ll need to decide what to do with your 401. Depending on what you do once you leave your job, you have several options. In this article, we describe four options you have when deciding what to do with 401 when you leave a job.
Keep The Money Where It Is
In most cases, leaving your job doesn’t mean your 401 has to move. While you won’t be able to contribute to it through paycheck withdrawals anymore, you should be able to leave your money invested right where it is.
Keeping your money with your current employer can be smart for a couple of reasons. You don’t have to sell any of your investments . You also don’t have to pay any fees associated with a rollover of the funds, which some 401 plans charge when you move money out.
But there are some downsides to inaction. If your plan fees are high, you’ll be stuck paying them while losing benefits such as an employer match that may have made participating worth the cost.
You probably also have fewer investment options in your 401 than if you moved your money to an IRA. Plus with your money spread across different accounts, it can be harder to look at the big picture and see if your portfolio is balanced. When you have multiple old retirement accounts, there’s even a chance you may end up forgetting about the money and leaving it unclaimed.
And if you have only a small amount of money in your company 401, you may not have the option to keep your retirement funds parked in your old employer’s plan.
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