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Starting a new job can be stressful. Between taking on new responsibilities, learning the company culture and navigating new policies, your to-do list may feel as if it is a mile long. Setting up your 401(k) retirement account, if your new employer offers one – and deciding what to do with one from your former employer – probably aren’t at the top of your list. But they should be.
According to a recent Bloomberg article, U.S. Census bureau researchers estimate that about 79 percent of Americans have access to a workplace 401(k) or equivalent plan, but only 32 percent of employed Americans are investing in them. This is troubling considering individuals are increasingly responsible for funding their own retirement. On top of that, people are generally living longer, so there is a need to fund longer retirements.
The good news is that in your long list of new job to-dos, setting up your 401(k) and reviewing your old accounts can be relatively simple.
“The first thing you need to know is that you generally have control of these assets,” says Rich Ramassini, a certified financial planner and senior vice president at PNC Investments. “The second thing is to remember that you opened the accounts to prepare for retirement, so keeping your money invested each time you change employers can help you reach that goal. In other words, think carefully about your options and don’t be tempted to cash out an old plan before retirement simply because you now have access to it.”
When you change jobs, you typically have four options for retirement accounts from previous employers:
If permitted by your former employer’s plan, this option allows your assets to remain invested tax-deferred, but can result in having multiple 401(k) accounts, which may make it more difficult to track performance and progress. If you leave money in a former employer’s plan, make sure that this is an active decision. “People generally don’t like change, which can lead some to allow multiple accounts to sit with various employers,” says Ramassini. Carefully consider investment options and the provisions of each plan. If your former employer’s plan truly fits your goals better, then consider sticking with it. However, you should review all plans each time you change jobs to determine which investment options better meet your needs.
With a direct rollover, your 401(k) assets from your previous employer are sent directly to your new account if permitted by your new employer’s plan. You never take possession of the money, so you may be able to avoid taxes and penalties. “Keeping your investments together in one place can be a great way to work toward your retirement goals,” says Ramassini. “It often feels better to build on something rather than start from a zero balance, so this option also can be motivating.”
Rolling money from an old 401(k) into an IRA allows your money to maintain its tax-deferred status. “401(k) contributions are generally made on a pre-tax basis, so as long as your money stays in a 401(k) or Traditional IRA, the taxes continue to be deferred until you withdraw,” Ramassini says. “People can change jobs 5-7 times throughout their careers, and not all employers offer 401(k)s. IRAs can give you the option of consolidating retirement funds into a single location, which makes it more convenient to manage and track investment performance.”
Choosing to “cash out” your retirement accounts gives you access to a lump sum of money, but also means you will have to pay taxes on the amount you withdraw. You should discuss potential federal and state tax implications with a tax professional. If you’re younger than 59 ½, the distribution also may be subject to a 10 percent early withdrawal penalty.
No matter what route you take, be sure to talk to your former employer about any specific plan rules or deadlines. Then, carefully evaluate each option and consider consulting a financial professional who can help you determine the best option for your situation.
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“Two-Thirds of American Aren’t Putting Money in their 401(k),” 21 February 2017
If you have a 401(k) from a former job, you may have several options to consider, each may have different costs, payment options and other features. Consult your legal or tax adviser for more information.
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