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Have you been laid off before, recently left a job, or just starting a new one? If so, keep reading. We’ve been getting tons of questions about what to do with old retirement accounts. This is a great question that is oftentimes not discussed, causing many people to “forget” or lose track track of their old accounts. Many people often make rushed decisions and think they need to pack up their savings when they leave a job. And conversely, some people pay no attention when they move from job to job and leave a trail of 401(k) plans behind them. With any employment change, it’s important to know which mistakes to avoid when it comes to your 401(k).
Here are some tips regarding your 401(k). First and foremost, pause before simply cashing out on your 401(k) when leaving a job. Cashing out and not reinvesting your funds in a qualified retirement plan is a mistake. People don’t realize the cost to their financial security by cashing out on their 401(k) and that cost includes an immediate tax hit – income taxes plus another 10% early withdrawal penalty if you are younger than 59 ½.
One thing to be weary of is not to roll over your accounts too many times. Employees who decide to move their money to another 401(k) plan or an IRA typically have two options—transfer the funds directly to another account, or do a rollover. Although “rollover” is when you move money from one retirement account to another. That money is best moved by direct transfer, but some employers will send a check. You have 60 days to roll that money over to an IRA or other qualified plan. If you miss that window, there is a grace period (with a penalty fee), but this is offered only once every 12 months, so direct transfers are often best to avoid penalties and issues.
There are plenty of good reasons to move your money into an IRA (individual retirement account). These accounts aren’t linked to any one employer and consolidate your money into a single retirement account. You also are not confined to that employers or old 401(k)s fund lineup, so may have more flexibility moving over to an IRA. However, your employer’s plan may offer you access to investment options, tools and institutional pricing that you might not get with an IRA so it’s important to analyze that beforehand.
Next, make sure not to overlook other tax strategies. There may be other strategies to consider when weighing a job move, although most people associate 401(k) plans with pretax contribution. One option may be to convert the savings to a Roth IRA; you’ll owe income taxes on what you convert, but future growth and withdrawals will be tax free. If your income is lower that year, the tax impact will be less. For those who’ve accumulated their employer’s stock in their 401(k) plans, leaving a job may open the door for an often overlooked tax break.
As we get ready to kick off summer plans, use this opportunity to evaluate and understand what old accounts you have if any and your options to consolidate them. Keeping regular tabs on what is going on with your investments is critical to ensuring they line up with your goals for the future.
Related: How To Get Your Financial House in Order Before Buying a Home