Getting a new job can dramatically change your financial situation with a new salary, new prospects for advancement, and new benefits. But in all the excitement, don’t forget about the retirement benefits you’ve earned from previous employers. Making the right decisions about your retirement strategy now during your job transition can pay off handsomely later on.
You may be tempted to just take the money out of your retirement plan. Maybe you’ll use a portion to cover some big upcoming expenses, put it in a savings account, or invest it somewhere else.
However, one problem is you’ll pay very high taxes on your distribution. You’ll be liable for regular federal, state, and local income taxes at your top rate as well as a 10% additional penalty.
Cash withdrawals can set you back significantly in reaching long-term financial security, even if you’ve only been saving for a little while. Depending on how long you were at your last job, you may not have a huge amount in your 401(k), but when it comes to retirement savings, every little bit counts.
Instead, make a strategy. Taking a cash withdrawal may seem like the simplest option, but it may not always be the right one. Follow these six steps to find the right retirement plan strategy after a job change.
Start with the most recent statement you’ve received about your account. If you can’t find a paper copy, you can usually access this information through your provider’s online portal. You’ll want to double check all the details: your current balance, how much you’re contributing, and your employer match as well as the funds you’ve chosen and their recent and long-term performance and costs.
Some plans employ vesting, most typically for the employer match. That means that you don’t get credited with your employer’s contributions until a certain amount of time has passed. Federal law permits vesting schedules of up to six years, so it’s a good idea to review your plan’s provisions to find out whether you’ll have access to all or just part of the employer contributions you’ve accumulated. The contributions you make out of your own paycheck are yours immediately.
You may also want to spend some time reviewing the investment choices you’ve made. You may be able to roll over your assets into the same or similar funds when you make the transition, or you may want to make new choices that better reflect your needs.
In general, there are four ways to handle your retirement plan assets during a job change.
Some plans allow you to keep your retirement funds where they are, in the same funds with the same provider. This can be a great, simple option especially if you’re happy with your current plan. You won’t be able to make additional contributions, and you may not be able to borrow against your retirement assets. Also, you’ll likely have a retirement plan benefit at your new employer. You may not want the complexity of overseeing multiple plans.
Many company’s plans allow new employees to roll over assets into the new 401(k). This is a relatively straightforward process. Either you ask your old employer’s plan to transfer assets directly into the new plan, or you can request a check and deposit it into the new plan. If you request a check, you must deposit it within 60 days to avoid taxes and penalties. Also, if you request a check, your old employer is required to withhold 20% for Federal Income Tax (though you’ll get this back when you file your taxes for that year if you meet the 60-day requirement).
You can also roll over your former job’s 401(k) into an IRA. The process is essentially the same as for a 401(k) rollover, using either a direct transfer or a check, and the same 60-day time limit applies. This can be a great option if your new job doesn’t offer a 401(k) or if what they offer doesn’t meet your needs for investments, convenience, or cost efficiency.
Finally, you can just take the money. However, this is almost never a good idea because you’ll have to pay income taxes on your distribution, and if you’re younger than 59 ½, you’ll pay an additional penalty of 10%. Cashing out also wipes out your retirement savings, putting you further behind on your journey towards long-term financial security.
Most retirement plan rollovers are free, meaning there are no additional costs for moving your assets. However, you should still review costs and expenses in the new account. Even slightly higher than average fees for administration and investments can significantly erode your savings power over the many years you have until retirement.
Rollovers are also typically tax-free, as long as you follow the rules. A direct transfer is the easiest way to make sure you meet the IRS requirement for reinvesting funds within 60 days. If you ask for a check and redeposit it, make sure you do it within the 60-day window.
When you roll your assets over, either into an IRA or your new employer’s retirement plan, you may want to review your investment strategy. If you’re not happy with your returns or the risk you’ve taken, or if your needs have changed, this is a great time for a reset.
Start by finding out what funds your new plan offers. Can you stay in the same funds? Are there similar options? Are there other strategies or assets that you’d like to incorporate into your plan? You can replicate your old choices or make new ones.
Think about your asset allocation strategy1. If you haven’t revisited it in a while, it may need adjustment. Your financial professional can help you find the funds that best fit your needs.
You’ll also need to review performance and fees. Seek out top-rated, four- or five-star funds in each category. These are the funds that have done best over time in a variety of market conditions. And don’t forget about fees. Make sure you’re comfortable with the fees you’re being charged for each fund.
This may sound like a lot of work especially if you’re in the midst of a job change. Fortunately, you can share some of the burden with a seasoned professional who understands all aspects of retirement planning. Ask your New York Life financial professional to help you assess your options now while you’re making the change, and think about scheduling regular meetings to help you stay on track. Your financial professional can help you monitor and adjust your plan as your life evolves, maximizing your opportunities for success.
A new job can be all-consuming as you meet new people, learn new skills, and face new challenges. But though you’ll be busy, it’s important to make time to think about your retirement strategy during and after a job change. The choices you make now can have a significant impact on your long-term financial security. Ask your New York Life financial professional for help in determining the right strategy for you.
1Asset Allocation does not ensure a profit or protect against a loss but is intended to help you manage your goals and risk tolerance.
This article is provided for general informational purposes only. Neither New York Life Insurance Company, nor its agents, provides tax, legal, or accounting advice. Please consult your own tax, legal, or accounting professional before making any decisions.
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