Whether you’re leaving your job to pursue other opportunities or on the wrong side of the economic downturn, the transition can be a stressful experience.
Research shows that the average American employee switches jobs 12.3 times before retiring.Job changes can mean that many Americans have old 401(k) plans, which may not be allocated properly to help them prepare for retirement.
Every time you change jobs, you have some choices to make about your old 401(k). Generally, there are four basic options:
1. You can leave the assets in your former employer’s plan, if permitted.
2. You can roll over the assets into your new employer’s plan, if one is available.
3. You can roll the assets into an Individual Retirement Account (IRA).
4. You can take a cash distribution (and deal with the potential tax consequences).
Each of these options has advantages and disadvantages to consider. We can help you hopefully avoid common (and expensive) mistakes and show how you can use your 401(k) as a tool to help with your retirement preparations.
Understand and compare these and other factors before deciding what's best for you:
Every investor is different, and volatile markets make customized strategies important when pursuing your financial objectives. Workplace retirement strategies often offer limited investment options that may not be right for your financial situation. In contrast, IRAs can hold nearly any type of investment, which allows for flexibility in your investment strategies. By rolling over your 401(k) savings into an IRA, you open up a universe of investment options that you can use to build an investment strategy aligned with your long-term goals.
401(k)s and other workplace retirement accounts come with administrative fees and expenses, which may take a bite out of your investment gains. IRAs also have fee structures that include various fees and expenses. We’re committed to making certain you understand what costs are associated with your IRA. We believe in being completely transparent about the costs and fees associated with any investment we recommend. We work with each of our clients to find investments that are best suited to their needs and long-term goals.
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When our clients come to us for guidance on rolling over a 401(k) or other workplace retirement strategy, we walk them through the four options previously discussed. One of those options is liquidating your old plan and receiving the money directly. While it can be tempting to see your savings as a quick source of cash, cashing out can be a big mistake that may cost you thousands in penalties and taxes, and it may prohibit you from years of future growth.
One of the best arguments in favor of rolling over your old retirement plan is that it can help simplify your life. In our experience, investors tend to lose track of accounts that aren’t right in front of them. Life gets busy and failing to modify your investment strategies to keep up with your needs can undermine your long-term financial success. Putting your assets in one place can help ensure that your investments are reviewed regularly and remain consistent with your financial goals. As a former employee, dependent on the plan, you may not be able to make changes to your investments, preventing you from adjusting your allocations to fit your current circumstances and long-term goals.
There’s nothing wrong with keeping your money parked in your old 401(k), if your former employer allows it. In fact, if you part ways between age 55 and 59-1/2, many plans will allow penalty free withdrawals. With an IRA, you will have to wait until age 59-1/2 to achieve a penalty free withdrawal. Other important factors to consider before leaving are fees, what to do with company stock, and protection from creditors and legal judgements.
Talk to your new plan administrator to learn about their investments, expenses and plan rules. After all, it could also be easier to track your investment performance in one account versus several. Plus, in an emergency, you can also borrow against an active 401(k) – something an IRA does not allow.
Investments are just one piece of your overall financial picture. As financial professionals, we take every aspect of your financial life into consideration when building customized strategies for your retirement. True Blue Financial’s team of professionals can help you evaluate your situation, make an informed decision, and assist you with making the most of what you’ve saved.
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1 Bureau of Labor Statistics, August 22, 2019
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