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What to do with your 401(k) when you leave your job….
June 11, 2017
401(k)s are a great investment for a couple of reasons. The most significant is that many companies match dollars you put invest. Many people refer to this as “free money” because it is. Many companies with 401(k)s offer some sort of match, ranging from 25% to 100% of employee contributions, up to a limit. We always recommend that employees take advantage of the 401(k) their employers offer, especially if their employer matches employee contributions. Another benefit of 401(k)s is their high contribution limits. In 2017, you can contribute up to $18,000 and if you’re age 50 or older that number increases to $24,000. These limits do not include matching dollars!
Now that you have been contributing to your company’s 401(k), what do you do when you leave the company? Over 30% of Americans leave their 401(k) behind when they leave the company.
This a mistake because not only have you removed yourself from the account, but you subject your investment to fees. In addition, you lose the support of the plan provider and will not be informed about plan changes. You subject yourself to potential fee increases or investment options especially if you fail to keep on top of it, move or your former old employer loses track of your information.
What should you do with your 401(k) after you leave a company?
You have several choices...you could do nothing, cash out, or roll it over. If you are not sure what to do, SEEK PROFESSIONAL HELP! Even if professional help requires paying the professional a commission, it can save you money, tax penalties, or a reduction of your retirement nest egg. In the long run, it can be worth it to have a financial advisor provide you with the best option for you and your investment.
Although we believe you should seek professional help from a financial planner, here are a few tips to make sure you avoid mistakes.
#1 Don’t Cash Out
Almost half of employees cash out their 401(k) balance when they move to a new job which is an enormous mistake. Not only will you pay taxes on all that cash (plus a 10 percent early-withdrawal penalty if you’re under 55), you’ll lose out on the future compounding and growth from leaving it in a 401(k) or by rolling it into an IRA.
#2 Your 401(k) can be Rolled Over into an IRA
A rollover IRA is a better option than leaving the money in your old 401(k). You will have more investment opportunities and the fees are typically lower. You can also avoid a withdrawal penalty for taking money out of an IRA compared with a 401(k). With a 401(k), you can make withdrawals only after proving financial hardship; the money must be for certain purposes, such as buying a home or paying college tuition and you’ll owe taxes on the withdrawal plus a 10 percent penalty.
#3 Don’t Do NOTHING!
Many Americans keep their 401(k)s with their former employers and leave well enough alone. What they don’t realize is that 401(k) plans can be riddled with fees. In some cases, Americans are paying 2 to 3 percent annually just to have their money sit there. The other issue is that future investment options will be limited to whatever’s offered in the plan.
A financial advisor can inform you about the 401(k) fees specific to your account. In some case, your former employer’s 401(k) is comparable to what you would find in a low-cost rollover IRA. If you are happy with your investment selection, then feel free to stay put. However, you need to be careful that you don’t forget about this money. Make sure you rebalance your the portfolio and evaluate the funds that they’re in so you can make sure you can make decision accordingly. Your former employer may not be around forever. It’s your money and your responsibility to keep track track of your account.
These are just a few options. Whatever you do, don’t take the money as cash, to be turned into a car, TV or new pair of shoes. The return on investment is bad, you’ll give up that compounding money, and you’ll owe harsh taxes and penalties for the early distribution.