EP.9: 401K Rollover Options
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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. In 1946 William Whyte’s bestselling book The Organization Man outlines the typical American worker as offering loyalty in exchange for job security with few options and few opportunities. Today things are different - In today’s world employer’s offer less loyalty and employees give little to none. Our careers aren’t paths like they used to be - they are now like landscapes that are navigated through finding the proper work life balance knowing that work that is more than just a paycheck. We’re free agents, entrepreneurs as we continue to make up own brands. This all adds to a more transient workforce than ever before - changing jobs is now a common practice and with that comes changing employee sponsored retirement plans!
I’ve recently helped a few people with what to do regarding their 401ks when they part ways with their current company and take a new position. Through helping them it quickly became apparent that other people in the Rochester community may have the same questions regarding their options with their 401k investments when they leave their current employer – In this video I want to do a quick run through of the 4 options that are available to you when dealing with your 401k if you were to leave the company plan you’re in
First option. Keep the investments right where they are. If your employer allows you to stay in the plan this allows you to continue to take advantage of deferred growth potential, however you can no longer contribute to this plan once you leave. While this would be the easiest option I don’t always recommend it! Because down the road when you do want to consolidate your assets this can add to headache of doing so and simply make things more difficult when they don’t need to be. Plus you’re less apt to be staying on top of your investments when they’re spread out all over the place!
Second option. Rollover to your new company’s plan. If your new company allows this, which is usually the case – This option allows you to take your investments from your previous company and make a lateral move into the investments that your new company offers all while continuing your tax deferred growth potential. This is a fine option to take especially when the plans offers quality investment options very similar to the risk you were comfortable taking on before.
Third option. Rollover to an IRA – While 401k plans are without question becoming better and more transparent, you’re restricted to what investment options are in the plan which can vary and at times be limited. If you feel you’re at that point in your life where you’d like to have a relationship with a professional and receive financial guidance, then this option may be for you! In this case I would set up an Individual Retirement Account in your name and then have the funds from your previous employer deposited into your IRA into quality, low-cost investments that match the amount risk you are comfortable taking to continue the tax deferred growth potential.
Your Fourth option is Cashing out you plan and having the check be payable to you. This should be your last resort. All cash distributions from your 401k plan will be subjected to state and federal taxes, but if you go to cash before 59 ½ a 10% withdrawal penalty may apply on top of those taxes. And worst of all your money won’t have the potential to continue to grow tax-deferred. So think about this options before you act. Aside from this last option, it really depends on your individual situation which option is going to be best for you and where you are in your life. If you’re at all confused with which direction to go, I would be more than happy to sit down with you and explain these options in more detail so you know that you’re making an informed decision on what to do with your hard earned money! Or simply shoot me an email highlighting your situation and I’ll pass along my two cents to make sure you’re on the right track! Thank you for watching and as always thank you for giving your finances the attention that they deserve.
