Have you changed jobs recently? If so, chances are you have a retirement account with your former employer and you now have an important financial decision to make regarding this account. Let’s explore your options:
Keep your money in your former employer’s 401(k) plan
If your account balance is at least $5,000 you have the right to leave your money in your former employer’s plan. However, if your account balance is under $5,000, your former employer has the option of cashing you out of the plan, in which case this would not be an option for you. The benefit of keeping your money in your former employer’s 401(k) plan is that you do not need to do anything and you are already familiar with the plan. The disadvantage of this is you might be charged extra maintenance fees as well subject to limited investment choices that come with 401(k) plans.
Roll your money into your new employer’s 401(k) plan
Most 401(k) plans allow for rollovers from other retirement plans. This can be convenient to have your retirement funds in one place. The disadvantage of this is that you are subject to limited investment choices that come with 401(k) plans. A rollover to another retirement plan is tax-free.
Move your money into an Individual Retirement Account (IRA)
This is typically the most attractive option. Done properly, such as by a trustee-to-trustee rollover, this is a nontaxable event. IRAs have much more flexibility than 401(k) plans including greater investment options instead a small menu, as well as less fees and expenses and greater beneficiary flexibility.
Cash out your old 401(k) plan
This is almost never the best choice as it can create significant tax consequences. The amount cashed out will be taxable income. In addition, there is a 10% early withdrawal penalty for those under 59 and ½ years of age. However, if you left your job during or after the calendar year in which you turned 55 (age 50 for public safety employees of a state, or political subdivision of a state, in a governmental defined benefit plan) the early-withdrawal penalty will not apply for funds held in that employer’s retirement plan.
Your 401(k) account is often a significant portion of your net worth and retirement strategy. Contact ClarkSilva today to talk through your options.