Switching jobs can be an exciting — but difficult — time. When you’re changing companies or positions, you have a lot you need to get used to. From a new commute to a new set of job duties, you have a lot of changes going on in your life. It’s easy to feel overwhelmed.
One of the areas that may be overwhelming you is your 401k. Depending on how long you’ve worked with the company, you may have established a pretty sizeable retirement fund during your time in the office. You don’t want to see that money disappear.
There are a few things you can do to ensure the 401k is taken care of after you leave. Let’s consider what your options are and when you may want to consider each.
Understanding Your 401k
While the money in the account is yours for retirement, the account itself technically doesn’t belong to you. When you create a 401k with an employer, you’re not able to carry that same account with you as you go from job to job. The 401k account is linked to the company — not to you.
This can make it a bit difficult when you switch jobs. Because you’re unable to take your old 401k to your new job, you need to transfer the money from one account to another. While you can leave the money in the account, it won’t be active, so neither you or your employer will be making contributions. This means you’re missing out on potential growth.
Additionally, having money in many different accounts can be confusing and difficult to manage. To ensure you’re getting the most of your retirement fund, you want to keep it all in one safe place.
Your past employer may also have rules for what they do with a 401k that has been left behind by an employee who has moved on from the company. They may automatically roll the money into an IRA for you, or the money may be automatically cashed out — depending on the amount you have saved.
Before you make any decisions, it’s important to talk with someone at your old office to know which practices are in use. You’ll want to know if and when they make an automatic decision, so you can be properly prepared.
Moving a 401k
When preparing to switch jobs, you have two main options for transferring your 401k account. First, you can simply roll the money over into the new 401k account you’ve established with your new employer. Keep in mind that this account will have the same rules as your last account. If you should leave this job, you will need to transfer the money again.
You also have the option of putting the money into an IRA. An IRA, short for Individual Retirement Arrangement, is a different type of retirement fund that allows you to save money for retirement without an employer-sponsored account. This means you do not need to continuously move your money if you switch jobs.
There are different benefits of each. Whether you create a new 401k or open an IRA will depend on your unique situation.
Here’s a closer look at what each includes and when they should be used.
When Should You Roll Into a New 401k?
If you’re going to a new company that offers a 401k, you may want to consider rolling your old plan into your new plan. When you make the decision to roll your old 401k into a new 401k, you’re keeping all your money in one place. This can allow you to make better management decisions and keep an eye on the growth.
However, transferring a 401k to a new account can have high fees you’ll need to pay. While moving the money into a new account can allow you to keep your funds in one place, it may not be worth it if the fees will eat away at a large chunk of what you’ve saved. This is especially the case if you plan on moving jobs again soon.
Rolling your funds into a new 401k can make sense when it’s a seemingly one-time move with fees that won’t take away the majority of your savings. If you’re not a job hopper, you may want to consider just moving your money into a new 401k with your company. But, if you’re frequently looking for new employment, always transferring your 401k could leave you without much money when retirement comes.
Whether or not a 401k option is right for you will also depend on the offerings your new employer is giving you. Because the employer can control the funds you invest in, some plans may not give you the flexibility you’re after. However, if the company you’re moving to has a great retirement compensation plan, you may want to consider moving your 401k to a new account.
It is also important to note that money within a 401k is protected against both bankruptcy and lawsuits. This means if you’re ever facing bankruptcy or are being sued, the court cannot go after your money in a 401k — which isn’t the case with an IRA. This can seriously protect your retirement if you ever find yourself in an unfortunate position.
When Should You Roll Into an IRA?
IRAs can be a bit more difficult than a 401k, simply because there are many different kinds of IRAs out there. If you’re looking to roll over your 401k money into an IRA, you would be looking at creating a traditional IRA because of the taxation rules. Like a 401k, money in a traditional IRA is taxed when the funds are taken out. Because funds must stay within the same tax status, you would be unable to move the funds into a Roth IRA.
A traditional IRA is a great option for people who frequently change jobs. Because an IRA is connected to you — not the company — you do not need to move the money each time you change jobs. Instead, you can simply transfer that company’s 401k fund into your already established IRA, treating it somewhat like a deposit pool.
With an IRA, you’re also in charge of where you invest your money. Because your employer is not connected to the account, they cannot dictate which stocks you invest in. This allows you to have more flexibility in playing with the stock market, or permitting you to invest in companies you enjoy and care about.
However, opening an IRA typically means you’ll be left with more than one retirement fund. If you have both your IRA and your 401k with your new company, you’ll have multiple accounts to manage. If you’re capable of overseeing both, this shouldn’t create too much of a problem.
It is also important to note that your employer typically won’t contribute to your IRA. While there may be some outlying situations, employers will traditionally want you to follow the retirement account plans they’ve established. This means only you will be funding your IRA.
Your IRA is also not protected from bankruptcy or lawsuits. If you have substantial debt or you’ve been sued, you may need to pay off fines and fees with the money in your IRA. If you could potentially face either of these situations, you may want to consider a 401k instead of an IRA.
How to Roll Your 401k Over into a IRA or New 401k Account
Once you’ve decided which is the right option for you, it’s time to roll the money over. Whether you choose to move the money into a new 401k or an IRA, you’ll want to begin by getting your new account established.
If you’re moving your money to a new 401k, talk with your new employer about what needs to happen to get your new account open. They should be able to assist you in getting your new 401k account ready shortly after you begin your new position.
For those opting for an IRA, you’ll want to contact a bank of your choice to open the account. Traditional investment banks like Vanguard and Fidelity can both provide some IRA options for you.
Once you have your new account open, contact the bank housing your old 401k. Simply let them know you’d like to roll over your old account and provide them with the information they need to make that happen. In most circumstances, this can be done over the phone.
However, keep in mind that there is a difference between rolling the account over and account distribution. When you roll the account over, you should not need to pay taxes on the money. Make it clear to the individual you speak with that you’re not looking to distribute the account.
It’s difficult to say whether or not you should move your money to a 401k or to an IRA. Each situation has its benefits and drawbacks, so it’s important to weigh them against your unique circumstances. Consider which can bring you the most benefits, and follow that path.
Are you looking to change jobs, or have you in the past? Share your tips for making the switch in the comments!
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