You did it; you contributed money toward your 401(k)! You may have even contributed the maximum amount each year, which is $17,500 for 2015, and waited the 5-6 years (maximum) to be fully vested. Now let’s say you were offered an amazing employment opportunity at another company. What should you do with your old 401(k)?
First, each company’s plan structure is different. Your first step should be to talk to Human Resources at your old job, as well as your new job, to get individual information on what each plan allows. Once you know what you can and cannot do, you can follow one of the following steps.
Leave it at your previous job: When you are happy with the current plan, and if your firm does not automatically roll it over to an IRA, you will continue to have the benefit of leaving the funds in the plan with your former employer. Having more purchasing power can reduce fees and may open opportunities for investments you otherwise would not get on your own. If you are near retirement the IRS allows penalty-free withdrawals as early as age 55 after a separation of service from a 401(k). Usually, if you have over $5,000 in your 401(k) companies will give you the option of leaving your plan behind. Remember… once you are no longer an employee of the firm, you are not allowed to make further contributions into the plan. Once again, every plan is different and you should compare expenses, costs and investment choices before you make a decision.
Rollover to your new employer’s 401(k): Your new job’s plan may have different investment choices – some plans offer stock options and if you work for a firm like Carson Wealth, they may let you invest into their own equities strategies. If the plan’s investments are not to your liking but your company offers a match, you should consider contributing at least the maximum match amount, so you can get that extra free money.
Rollover to a retirement account: If your new job does not offer a 401(k) option or if you prefer having larger and more flexible investment options without the restrictions placed on a 401(k) plan you can transfer your money into a retirement account. Maximum contributions for both a ROTH and a Traditional IRA are $5,500 for 2015.
Traditional IRA: The benefit of a traditional IRA is that contributions are tax deductible which more money working for you, and earnings grow tax deferred. After age 59 ½ you can begin withdrawing the funds and you will pay taxes at that time but will not incur the 10% penalty for early withdrawal.
Roth IRA: If you are on a low tax bracket and you think your income will grow substantially, the IRS allows you to rollover your 401(k) into a Roth IRA. It’s important to know you will have to pay taxes on the full amount of the rollover. You should discuss this option with your advisor to see if it makes sense for your specific case. Because you are using after-tax money, the principal can be withdrawn tax-free at any time and once the account has been open 5 years, you can also withdraw earnings for qualified expenses including tuition, medical expenses and first home purchases. All distributions after age 59 ½ are tax free. Remember…if you decide to rollover your 401(k) into your retirement account then it important to do a direct rollover. What does that mean? It means requesting the funds to go directly to the custodian, or trustee. The check must be under their name, not yours. It cannot touch your hands or you could receive a 10% penalty if you are under age 59 ½. You will also have to pay taxes on the full amount if you don’t deposit the money into an IRA within 60 days.
Whatever you do, make sure you review your investments at least annually and always consult with your advisor before you make big decisions regarding your 401(k). You worked hard for your money, so now make it work hard for you!