In my July column, I discussed steps I take with clients and prospects to plan for their retirement. To review, the steps were:
• Calculate how much income you will need during your retirement years.
• Calculate how much must be saved to replace your employment income.
• Implement, monitor, and adjust the plan as necessary. Following those simple steps can greatly increase your chances of reaching your retirement goals.
My experience with clients and prospects, however, is that once the initial steps are implemented, there is a tendency to forget to adjust the plan as circumstances change. This is especially true when people change jobs. Changing or leaving a job can be an emotional time. You’re probably excited about a new opportunity — and nervous, too. And if you’re retiring, the same can be said. As you say “goodbye” to your workplace, don’t forget about your 401(k) or 403(b) with that employer. You have several options, and it’s an important decision. Besides dera iling a well-crafted retirement plan, if done incorrectly, you might be liable for taxes and penalties.
First, you can leave your account with your former employer’s retirement plan. If your account balance is more than $5,000, many companies allow you to keep your retirement savings in their plans after you leave your job. This option takes no action on your part, and most often people choose this option because it is easiest. Not transferring your 401k isn’t always a matter of procrastination, sometimes there are valid reasons to consider leaving your retirement plan where it is. For instance, you might be more comfortable with the funds you are invested in and your current asset allocation may complement your overall investment strategy. And in some cases, an employer-sponsored retirement plan may offer participants access to institutional share class mutual funds and lower cost index funds.
Experience shows it can be easy to pay less attention to or forget about your old retirement account once you are no longer making additional contributions to the account. A second option is to transfer your old 401(k) into your new employer’s retirement plan. Choosing this option will avoid penalties and taxes if you make a direct, trustee-to-trustee transfer between the two plans. For simplicity, transferring old 401(k) assets to your new plan could make it easier to track your retirement savings.
You may also be able to borrow from your 401(k) if your new retirement plan permits participants to take loans against their accounts. Each plan has different rules for borrowing, but a common borrowing limit is 50 percent of your vested balance up to $50,000. Transferring money into your new 401(k) increases the value of the account and the amount you may be able to borrow.
A third option is transferring the assets in your 401(k) into an individual retirement account. Choosing this option allows you to continue growing your funds on a tax-deferred basis, and if done correctly, you will avoid taxes and penalties on the transfer. In many instances, you will have more control over your assets in an IRA Rollover account, and you may also have a broader range of investment choices.
A final option, which might be very costly, is to cash out your 401(k). This option should be avoided unless the need for cash is critical. Besides upsetting your carefully crafted retirement plan, there are substantial penalties and taxes involved when taking a cash-out distribution. If you withdraw from your 401(k) before age 59-and-a-half, the money will generally be subject to both ordinary income taxes and a potential 10 percent early withdrawal penalty. You might also move into a higher tax bracket since the taxable portion of the withdrawal will be added to any other taxable income you have during the year.
So, if you’re considering moving on to a new job — or have already made the move — review all of your options to make an informed decision about what to do with the retirement funds you left behind. Be sure to consider all of your available options and the applicable fees and features of each before moving your retirement assets. Because your 401(k) may be a big chunk of your retirement savings, it’s important to weigh the pros and cons of your options and find the one that makes sense for you.
Anthony N. Corrao is an independent advisor with Corrao Wealth Management. For more than 25 years, he has helped families by developing financial, educational, and retirement planning strategies. He can be found at www.corra
Securities offered through First Allied Securities Inc., A Registered Broker Dealer. Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services, A Registered Investment Adviser.
The information is intended for informational purposes only, and it is not intended to be a substitute for specific tax, legal, or investment advice. Please consult a financial professional prior to making any investment decisions.