What to Do With Retirement Account When You Switch Jobs
• Did you know that you can expect to change jobs four times by the time you reach 32? That’s what career networking site LinkedIn found when it surveyed its users. And if you’re already in your 30s, you likely changed jobs at least twice in your first 10 years out of college.
• With all these new jobs, you’ve probably found yourself wondering: “Should I roll over my 401(k)?” Here are some ideas about what you might want to do with the funds in your old company’s retirement plan.
• Understand What You Can Do With Your Old 401(k)
• First, take a step back and review your options. There are four things you can do with your 401(k) through a previous employer:
o Leave the money where it is
o Roll over your old 401(k) into your new employer’s plan
o Roll over your 401(k) into an individual retirement account (IRA)
o Cash out
• There’s a chance that option one isn’t on the table. Typically, you must have a balance of more than $5,000 to leave money in your old plan. And if you leave 401(k) funds with your old employer, it might be easy to lose track since you can’t actively use or contribute to the account.
• Cashing out your 401(k) is not the right move for most people, either. For one, cashing out triggers a big tax penalty you’ll have to pay the next time you file your taxes. It also means dismantling part of your all-important nest egg.
• So the best option is usually to roll over your 401(k). The harder question to answer is whether you should roll over your 401(k) into your new employer’s plan or into an IRA.
• Should I Roll Over My 401(k) to My New Employer?
o First, verify that your new employer has a 401(k) plan. Certain employers may not offer a retirement plan at all or they may offer a 401(k) alternative plan, such as a 403(b) or SIMPLE IRA. Also, know if your employer offers contribution matching.
o If you think it’s important to keep your financial situation simple, rolling over your old 401(k) into your new employer’s plan might be a smart move. By doing so, you consolidate your accounts and keep your retirement money in one place.
o While this is a good option for many people, there are still some downsides. You may not like the fund selection in your new employer’s plan, for example, or the fees might be too high. You’ll also miss out on some of the hidden perks of IRAs. For example, in certain circumstances, Roth IRA funds can be used to help you purchase a house. Whenever you make a major financial move, it’s worth it to fully investigate all options and potential complications.
• Should I Roll Over My 401(k) to an IRA?
o This option provides you with more choice in how you use your retirement money, as you can choose to open an IRA with any financial institution and invest your money as you wish. It also means that you can name someone other than your spouse as the account’s beneficiary, whereas, by law, 401(k) beneficiaries must be spouses, if applicable — or your spouse needs to sign a waiver before you can name someone else as the account’s beneficiary. This option can also mean dealing with a lot more responsibility, though, since it’s completely up to you to invest and manage your nest egg when you go this route.
o Read up on the differences between a traditional IRA and a Roth IRA. You may be able to choose whichever one you prefer when you initiate your rollover. If you convert your 401(k) funds to a Roth IRA, you will have to pay taxes on the converted amount. Depending on how much money you have in your 401(k), you could end up with a hefty tax bill.
• Getting Started
o The easiest way to initiate a rollover into a new 401(k) is to work through the process with your new employer. Or, if you choose to roll over to an IRA, you can initiate that process with your financial institution. These are known as direct transfers. The companies involved can handle the rollover for you, which means you won’t need to deal with the funds yourself. Many times, this is a safer, more convenient option that requires little action on your part. On the other hand, with an indirect transfer, you get a check and then have to invest it within a certain timeframe. If you mishandle this or wait too long, you could accidentally trigger a tax penalty. So generally, it’s best to go with a direct transfer.
• Whatever you choose, be sure to keep your financial future in mind and meet with your financial advisor to see how this works into your overall retirement strategy. It’s important to make the most of the good savings work you’ve done already.
Additional online resources from KeyBank:
(This material is presented for informational purposes only and should not be construed as individual tax or financial advice. Please consult with legal, tax and/or financial advisors. KeyBank does not provide legal advice. KeyCorp 2017. KeyBank member FDIC.)