How to Manage Your 401(k) When You Switch Jobs
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The average worker holds a dozen jobs over their lifetime — so for those with a 401(k) or another employer-sponsored retirement plan, this can mean ending up with a lot of accounts at a lot of institutions. What happens to your 401(k) when you switch jobs or retire? How can you try to make your old 401(k) as efficient as possible? Learn more about your 401(k) options after leaving a job.
Your 401(k) Options
There are several ways to manage your 401(k) after you leave a job. Consider your choices as well as your individual situation and goals before you make your decision since there's no one-size-fits-all option.
Although many 401(k)s do not allow withdrawals — even with a penalty — while you are still employed after you leave there is nothing technically stopping you from taking out your entire 401(k) in cash.
However, doing so will cost you. A 401(k) withdrawal before age 59 1/2 will mean paying federal and state taxes on the entire amount in the year you withdraw it, along with a 10% penalty from the IRS. These taxes and penalties can take out a significant chunk from even a small 401(k).
Roll Over Into an IRA
If you already have an individual retirement account (IRA), you can request that your former employer roll the 401(k) over into your IRA. If you do not yet have an IRA, you can use this opportunity — and your 401(k) funds — to establish one.
Rolling over is often no more complicated than initiating a bank-to-bank transfer between the old and new retirement custodians, although the old custodian could instead issue you a check to give to your new custodian. By rolling your 401(k) over into a similarly tax-advantaged account, you can gain control of it and can invest it however you wish without paying taxes or penalties.
Roll Into a New Employer's Plan
Another option is to roll over your old 401(k) into your new employer's 401(k). This could allow you to streamline your accounts in one location and try to get your asset allocation is in line with your risk tolerance. Like an IRA rollover, rolling over from an old 401(k) to a new one can often be accomplished online and with minimal hassle on your part.
Leave It Alone
Although some 401(k) providers require former employees to remove their funds after they leave, many will allow former employees to maintain their accounts. You cannot add new funds to an old 401(k), but simply leaving it invested as-is for another decade or two might yield some significant returns. This can be a good option if your old 401(k) custodian has broader investment choices or lower fees than your new one.
The decision of what to do with an old 401(k) can have many moving parts. Talking this decision over with a financial advisor can ensure that your ultimate decision is tailored to your unique circumstances.
Talk to a Financial Advisor
Financial advisors with BECU Investment Services are here to help. They can assist you on your retirement journey, ensuring you are on the right track to achieving your financial goals. Set up a complimentary consultation or call 206-439-5720.
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