The road of life has many twists, turns, hills, valleys, and dips throughout its course. One of the most complicated forks in the road comes when one considers switching employers, because no one knows exactly what to expect in the miles ahead.
And what about the invested funds in your 401K? What will happen to your nest egg?
There are a few choices that require your consideration, because this is a very important topic. Keep in mind that no matter the case, it’s ultimately your money . Your plan administrators for both your new and old company are usually unbiased as to what you should do with your retirement funds. However, investment companies and financial planners can try to steer you in a direction that you may not feel comfortable with. This is because many of the people in this form of employment are paid by commission. They may try to convince you to reinvest your savings into a program for which they receive the highest fee. In any case, it’s always a good idea to educate yourself, and know what your options are:
- Take the Cash - This option, although seemingly a nice idea, can have brutal effects on your taxes. First of all, a withholding of 20% for your federal income tax only may be deducted from your check. Combine this with a 10% early withdrawal penalty if you’re under the age of 59 ½ and the result is nearly one-third of your money gone before you even open the envelope. Now, come tax time, if you’ve already had a good financial year, this money could easily put you into a higher tax bracket, creating a potentially depressing April 15.
- Roll it Over into a Rollover IRA (Individual Retirement Account) - This type of program was created specifically for this situation. It allows your 401K to continue to grow tax-deferred without penalty. A variety of investment options await you, as well. For example, mutual funds, stocks, bonds (or other securities, including CDs and Treasuries) are just a few of the new adventures waiting to be added to your retirement portfolio. Of course, if take a withdrawal on any retirement account before age 59 ½, you’ll be responsible for the 10% penalty and federal income taxes for the amount you take out. A possible downside to this option is that you may lose any special investment opportunities that you had through your employer. However, on a positive note, you could have some extra flexibility in rebuilding your retirement portfolio.
- Move it to Your New Employer’s Plan - Especially if you have your 401K deductions taken out on a pre-tax basis (thus lowering your taxed federal income), you can probably move your money to your new employer’s qualifying plan, if available. Be sure to check the provisions of your new employer’s plan before gearing yourself up to do anything. Your new plan administrator will know exactly what this process entails, and should be completely unbiased and helpful to your situation.
- Keep Your 401K Exactly Where it is - When in doubt, just leave it alone. Minimum balances may be required, usually about $5,000, and your plan may have limitations on your investment and distribution options, so be sure to check your plan’s rules and regulations.
In any case, you’ve worked incredibly hard for your money and invested it well for your retirement. Spending it now will defeat its purpose, so be sure to look into all options before deciding what’s the best route for you to take with your 401K from your former employer.
