Did you know that more than half of working Americans have considered a job change in recent years? Even if you have never pursued a career change or accepted a new job with a different employer, you may in the future. The US Bureau of Labor Statistics reports that on average, people hold jobs for an average of 4.6 years.
New job opportunities can be exciting, and there are many facets of these changes to explore. When you begin work with a new employer, you could receive a new benefit package that includes retirement account options.
However, many people are unsure of what to do with the 401(k) account they still hold from their former employer. Planning for retirement can feel overwhelming at times, but you have options when it comes to retirement accounts. Here’s how to make an informed decision for your future.
Keeping Your Old 401(k) Account
There are several good reasons why some people elect to keep their 401(k) account open with a previous employer. Most employers allow former employees to maintain their existing 401(k) if it has already accrued more than a certain account minimum value, for example $5,000. If your former company offers this option and you have a plan portfolio that meets your needs, this may be a good option for you. However, there are some potential drawbacks to this plan.
Many people “forget” about their old 401(k) account, adopting a “set it and forget it” mindset instead of actively monitoring their investments. This can leave money on the table, creating a less secure financial situation than they once imagined.
If you choose to keep your existing 401(k), make sure you’ll be able to access it for the long term, and plan to check in on your portfolio on a regular basis. Before making a choice, talk to your former employer to make sure you know what options are available to you.
Rolling Over Your 401(k) Account
If you believe that you may not actively monitor your 401(k), you have better portfolio options through your new job, or your previous employer does not allow you to keep your account after leaving the company, you have rollover options.
Rolling Over Into a New 401(k)
In many cases, individuals find that opening a 401(k) plan with their new employer is the best option. Before making any decisions, talk to your new employer to determine what their plan looks like and when you become eligible to participate.
If you move forward with a new 401(k), create a rollover plan that will keep you from paying unnecessary penalties or fees. Most commonly, this is done through a direct transfer, also called a trustee-to-trustee transfer. This means that the balance of your previous 401(k) is deposited directly into your new plan, keeping you from potentially paying withdrawal penalties or taxes.
You can also opt for an indirect rollover, which means you’ll receive the balance of your previous 401(k) directly in the form of a check. Keep in mind that you’ll need to deposit these funds into a new retirement account within 60 days. If you fail to do so, you’ll be subject to income tax on the full amount, not to mention a 10% early withdrawal penalty if you haven’t yet reached retirement age.
Rolling Over Into a Different Retirement Account
Even if your new employer doesn’t offer a better 401(k) plan, there could be some advantages to re-evaluating your retirement plan when you begin a new job. If your new job doesn’t offer a 401(k) you like – or offer one at all, you may consider rolling over your old 401(k) into an individual retirement account (IRA) instead.
If you roll over your old 401(k) account into a traditional IRA, you will not pay any taxes at the time of the transfer. You’ll still have to pay taxes when you withdraw the money after retirement, just as you would with a 401(k). If you opt to open a Roth IRA, you’ll have to pay taxes on the balance at the time of transfer, but any earnings that accumulate after that will be eligible for tax-free withdrawal at retirement, as long as your account has been open for at least five years.
Find a Retirement Plan That Works For You
At Marietta Wealth, we offer retirement planning services for companies and individuals, as well as investment management and financial planning for individuals.
If you’ve recently changed jobs and want to determine your best path forward for retirement, we would love to help. We have advisors who can discuss your retirement account options and help you make the right choice for your objectives in the years ahead.
Our team is committed to helping you achieve your goals and experience the freedom that comes with an informed plan for your financial future. Get in touch with us today to learn how we can help.
The information provided is for informational purposes only. It is not intended to be used, and should not be used, as the sole basis for legal and/or tax advice. Individuals should seek and rely upon the guidance and advice of their own legal and tax counsel before making any decisions regarding any planning, investment, tax concepts or strategies discussed herein. Individual circumstances may vary and results discussed are no guarantees of applicability or future performance.
Marietta Wealth is a registered investment adviser. Registration of an investment adviser does not imply any level of skill or training. For additional information about Marietta Wealth’s financial planning and advisory services, please see the Marietta Wealth Disclosure Brochure or ADV Part 2A for full details, which is available upon request or by visiting our website.