Evaluate your Options to Maximize your Retirement Savings

Key Takeaways:
  • Evaluate your 401k options carefully to maximize your retirement savings and avoid costly mistakes.
  • Rolling over to your new employer’s plan or an IRA can consolidate your investments and keep your retirement on track.
  • Before cashing out, consider the significant penalties and tax implications that could derail your financial goals.

 

Transitioning to a new job can be cumbersome and often your former employer’s 401k can be an afterthought amongst all the new changes. You’re not alone if this slipped your mind. According to a recent study by Capitalize, over 29 million forgotten 401(k) accounts collectively hold a staggering $1.65 trillion. The primary reason for 401k accounts being left unaccounted for is employees are not well informed about their options. Be uninformed no more. These are the options available to an employee and a breakdown of each option. 

1. Leave your 401k at your Former Employer 

At first glance, this might seem counterintuitive. But in certain situations, it can be a viable choice.  

Know the Rules: 

  • Secure Act 2.0 Update: If your 401(k) balance is over $7,000, you can typically leave it with your former employer. If it’s below $7,000, they might cash it out or transfer it to an IRA on your behalf. They’ll notify you, usually giving you 60 days to decide. 

Pros: 

  • Your investments stay in the market, potentially growing tax-deferred. 
  • Employer-sponsored plans often benefit from institutional pricing, which can mean lower fees compared to individual accounts. 
  • With a curated list of investment options, managing your portfolio can be straightforward. 

Cons: 

  • You have less control. You’re subject to any changes your former employer makes to the plan. 
  • It’s easy to forget about this account, leading to potential neglect. 

2. Roll it into your New Employer Plan  

As you enroll for benefits at a new employer, it’s important to check if your new employer has a compatible retirement plan and allows for rollovers into the plan. If your employer does, this is a great option to consolidate your investments and keep your account front of mind. 

Pros: 

  • Rolling over your nest egg into the new plan allows for compounding growth with your new contributions. 
  • Your savings remain tax-deferred. 
  • Larger employers might offer plans with lower administrative costs. 

Cons:  

  • If you move to a smaller employer, you may have higher fees. 
  • You’re limited to the investments available within the plan.  
  • Some employers have waiting periods before you can enroll or roll over funds. 

3. Rollover it into an Individual Retirement Account (IRA) 

If your new employer doesn’t offer a rollover, a compatible retirement plan or you would like more investment options, rolling it into an IRA Is a fitting option.  

Pros: 

  • From stocks and bonds to mutual funds and ETFs, IRAs typically offer a broader range of choices. 
  • Your savings continue to grow tax-deferred (Traditional IRA) or tax-free (Roth IRA). 
  • As long as you have earned income, you can keep contributing, subject to IRS limits. 

Cons: 

  • Without the bargaining power of a large group, fees might be higher. 
  • You’re in charge of managing your investments unless you hire a financial advisor. 

4. Cash it Out 

Cashing out of the 401k is an option but may be the costliest due to taxes and penalties 

Pros: 

  • If you’re in dire financial straits, this provides quick funds. 

Cons: 

  • If you’re under 59½, expect a 10% early withdrawal penalty plus income taxes. Additionally, plans often withhold 20% for federal taxes. 
  • Cashing out halts the compounding growth of your retirement savings. 

Questions? 

Transitioning between jobs is hectic, but your 401k shouldn’t be an afterthought. Each option has its nuances, and what works best depends on your individual circumstances. 

Before making a move: 

  • Assess Your Financial Goals: Where do you see yourself in the next 5, 10, or 20 years? 
  • Consult Professionals: Financial advisors and tax professionals can provide guidance tailored to your situation. 
  • Stay Informed: Understand the fees, investment options, and rules associated with each choice. 

Remember, your 401k is a cornerstone of your retirement. Treat it with the attention it deserves, and your future self will thank you. Contact an Adams Brown Wealth Consultant if you have any questions.