If you're like most people, your 401(k) or employer-sponsored retirement plan is one of your biggest assets. When you leave your job, it's important to make smart decisions about what to do with the money in your retirement account. Should you roll your 401(k) into an IRA? Should you leave it where it is? Maybe you should cash it out so you can finally take that dream vacation!
Each of these decisions can have far-reaching effects. It's important to clearly understand the potential consequences before you make a move. Here's what you need to know about the four most common options.
1. Leave Your 401(k) Behind
If your previous employer allows it, you may want to simply leave your retirement plan where it is. This will ensure that your investment remains tax-deferred until you're ready to start taking withdrawals. Since you're likely already familiar with the plan's investment options and fees, it can also help minimize stress during a time of transition.
However, it's important to remember that you'll have to deal with your old employer any time you need to withdraw money. You'll also be limited by your plan's investment options and you may no longer have the ability to take loans.
2. Transfer to Another Employer Plan
Another option is to transfer your 401k to your new employer's retirement plan. Keeping the money in a qualified plan allows it to remain tax-deferred until you're ready to take distributions in retirement. In addition, having all of your retirement money in one place can simplify your money management.
However, not all plans allow transfers. You'll need to check with your new employer to see if this is available to you. Before you make your decision, you'll also want to make sure you're happy with the new plan's investment lineup and that you're comfortable with the plan's fees.
3. Roll It Into an IRA
If you want more control over your account and access to a wider range of investment options, then you may consider rolling your 401(k) into an IRA. This will also allow you to retain the money's tax-deferred status. Consolidating your accounts can also make it easier to manage your money.
However, since employer-sponsored retirement plans often have access to low-cost institutional funds, you may find yourself paying a bit more in fees. It's also critical to ensure that any rollover you initiate is done correctly. Otherwise, you could find yourself facing a big tax problem. It's always a good idea to consult a financial professional before initiating a rollover.
4. Cash It Out
This last choice potentially has the most serious consequences. Any withdrawals you take from your IRA account is subject to income taxes. If you cash out a large retirement plan, you may push yourself into a higher tax bracket, causing you to lose a significant portion of your hard-earned money.
If you're under age 59 1/2, you'll also owe a 10% penalty on any money you withdraw, unless you do it in 2020. A provision of the CARES act eliminates the penalty for withdrawals of $100,000 or less. However, this one-time break expires on December 31st, 2020.
Weigh Your Options Before You Decide
You've worked hard to build up your 401k. If you're leaving your job, you owe it to yourself to make the best possible choice about what to do with this money. At Bangerter Financial Services, we're committed to helping our clients make sound financial decisions. We'll help you weigh your options, decide on the best move, and implement your decision. Contact us today for a consultation.