If you are changing employers or find yourself unexpectedly unemployed, your financial plan can change dramatically, and you need to consider what to do with the assets in your 401(k) or other employer-sponsored retirement savings plan. Decisions made now can greatly impact your financial condition upon retirement, so it is important to research your options and understand the merits of each choice.
Sometimes you can leave your savings in your existing plan. Check with your employer to see if this is an option; you must have at least $5,000 in the plan. Although you will no longer be able to contribute to the plan, you will still have control over how your funds are invested among the plan’s investment selections.
Roll funds into an Individual Retirement Account (IRA).
A direct rollover preserves the tax-deferred status of your assets. Opening an IRA account is easy — simply call your financial advisor to begin. Next, communicate to your employer that your retirement savings should be rolled over to your new IRA account. Once you have the account established and funded, your advisor can discuss with you the many ways these funds can be invested to help meet your future goals.
Roll funds into a Roth IRA.
Unlike a non-Roth 401(k) or a Traditional IRA, contributions to a Roth IRA are made after taxes instead of pre-tax. So rolling your funds into a Roth IRA would allow you to grow your assets tax-free while they remain in the IRA. Many employers offer both Traditional and Roth IRAs. Importantly, if you do convert your non-Roth 401(k) into a Roth IRA, you need to set aside enough money to cover your income taxes for that tax year. As an example, if you convert $50,000 from a non-Roth 401(k) to a Roth IRA, you would be responsible for paying income taxes on $50,000.
Roll retirement savings into a new employer’s plan.
You may be able to transfer your retirement savings into your new employer’s retirement savings plan, and your new employer may offer different investment options. Visit with your new employer’s plan administrator to learn about your options. Understanding the new plan will allow you to make the choices that are the most appropriate for your financial objectives.
Redeem your retirement savings plan for cash.
While it is generally not your best option, it is possible to redeem your retirement savings for cash prior to retirement age. However, it is important to understand the associated costs and penalties: Your employer is required to withhold 20% of the account’s value as a prepayment of taxes, and a 10% early withdrawal penalty may apply. All of the account assets will then be counted as income for the purpose of calculating your taxes. Because of the added costs, this typically is not your best choice and is an idea you should discuss with your tax advisor.
There is no one right decision for everyone, and you will need to consider factors that are unique to your situation. But by exploring your options, you can determine which move is best for you. Make sure you pay attention to asset transfer rules to avoid missing a deadline or creating an unexpected taxable distribution. Rules among retirement plans vary, so it is important to learn the rules of both your former and future employers before making a move.
Today’s economic challenges can be overwhelming, especially after an employment change or layoff. At D.A. Davidson, our financial professionals offer information on IRA rollovers, 401(k) issues and more to help you better understand and analyze your financial picture.
Information contained herein has been obtained by sources we consider reliable, but is not guaranteed, and we are not soliciting any action based upon it. Any opinions expressed are those of the author and based on interpretation of data available at the time of original publication of this article. These opinions are subject to change at any time without notice. Investors should consult their financial and/or tax advisor before implementing any investment plan. D.A. Davidson & Co. is not a tax advisor. Before investing in any IRA, consult with your personal tax advisor about the specific tax consequences and advantages of your situation. Copyright D.A. Davidson & Co., 2021. All rights reserved. Member SIPC.