Americans are switching from one job to the next as they bounce from one career to another. But, what is happening to your 401(k) retirement plan in the process? There are four options for investors. You can leave your 401(k) with your old employer, roll it over to your new employer’s 401(k) plan, roll it over into an IRA, or simply cash it out.
Find out now: How does my 401(k) work?
A report from the Government Accountability Office (GAO) suggests that 401(k) retirement plan participants may not be making the best choices about what to do with their former employer’s 401(k) plan after they switch jobs.
Should You Roll Your 401(k) Over To Another 401(k)?
The GAO found that one option in which many 401(k) participants often do not utilize is to rollover their old retirement plan into their new employer’s 401(k) or similar tax deferred retirement plan. You can have your old plan’s custodian transfer your investment to your new plan automatically without you having to get involved directly. This will keep you from accidentally holding onto the proceeds too long. Holding them too long can get them classified as a distribution in the Internal Revenue Service’s eyes.
It is almost always the best idea to conduct a direct transfer between the two funds without your involvement. As long as you are moving your employer’s old 401(k) fund into a similar 401(k), 403(b), or other similar tax deferred retirement plan, you will not have to pay an early withdrawal penalty or taxes on the account.
Should You Open An IRA With Your 401(k)?
Another option and one that almost 90% of all 401(k) plan participants choose is to open an individual retirement account (IRA). Many investors receive very aggressive and hard sales pitches to try and encourage them to rollover their 401(k) plans to IRAs. In addition, a transfer to an IRA is often a quicker and slightly easier process of moving your retirement account out of the clutches of your former employer. A traditional IRA will still carry the same tax characteristics with the funds being tax deferred until you withdraw the account during retirement.
Related Article: IRA vs. 401(k)
There are a few drawbacks of IRAs versus 401(k) plans that employees should be aware of when rolling over their retirement funds. IRAs often have a higher cost than many employer sponsored 401(k) retirement plans. Additionally, IRAs often require more investment knowledge and involvement by the investor than a 401(k) plan.
What Not To Do
Another option that investors have is that they can leave their 401(k) plans with their old employer. While this is often an okay option while you are investigating alternative investments to move your retirement accounts to, it is not a long-term solution. You should not leave your old 401(k) retirement plans with your former employer too long. You should look to roll over your investments as soon as possible.
You cannot continue investing in your previous employer’s 401(k) plan after leaving. And, while there are some protections against fraud and other wrongdoing, it is comforting to have your hard earned retirement investments as close to you as possible. Remember, no one cares more about your finances than you do. It often pays to keep a close eye on your investments and to keep them close to you.
The last option is to cash out your 401(k). This has serious tax implications. While it might be something to consider in an emergency situation, be sure to do some research or speak with an accountant or tax advisor. You don’t want to be surprised by large and avoidable fees and taxes.
The GAO report found, above all else, that 401(k) plan investors were not being provided with the enough good information in most cases to make informed decisions about the future of their 401(k) plans. Do some research and don’t be afraid to ask questions. And remember, in most cases rolling over an old 401(k) retirement plan to your new employer’s 401(k) plan is the best choice.
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