The average person holds 12 jobs over the course of their lifetime and, understandably, each change can be a busy, emotional, and stressful time.
In the midst of signing up for new benefits, adjusting to a different workload, and possibly even moving to a new city, sometimes your employer-sponsored retirement plan or 401(k) can slip your mind and be left behind.
Once you realize that money is still out there, the prospect of figuring out what to do with it may feel daunting. But you should view this as an opportunity to maximize and accelerate your retirement savings. After all, it is your money.
To help get you started on the path to recovering your hard-earned money, here are some key options and considerations to help you decide what to do with your old 401(k) or employer retirement contributions.
What Are Your Options?
Many factors can influence your decision or determine the specific options you may have—such as how long you were with any employer before you left, specific plan requirements or conditions, or even tax implications. However, people generally have three options to choose from when it comes to the funds in their old retirement plan:
Option 1: Bring It with You to Your New Employer
During the new-hire onboarding process, many employers that offer retirement plans provide guidance on how you can transition your funds from a past retirement plan to theirs. Take advantage of the benefits staff or retirement plan representatives to explain your options and next steps.
Option 2: Leave It with Your Old Employer
If their plan requirements and conditions allow it and it meets your needs, you may be able to leave your existing retirement balance with your old employer. While this can make sense for some situations, such as if the retirement plan offers lower fees or specific fund options, it can make overall management of your retirement balances more complicated.
Option 3: Roll It Over into an Individual Retirement Arrangement (IRA)
You also have the option to transfer your 401(k) balance to an IRA, either one you establish for this purpose or one you may already have in place. Just note that you are only allowed one rollover per year without incurring extra tax implications.
Key Factors to Consider When Making Your Decision
As you are working through which options makes the most sense for you and your retirement goals, here are a few key factors to consider:
Management Fees and Investment Strategies
As you may already be aware, retirement funds can be invested differently depending on the management firm you are working with as well as the fund options that each has available. Some have created their own portfolios that you can invest your money in with different allocations of stocks, bonds, and existing traded funds. Others pin their investment portfolios to a group of stocks that are a representative sample of an existing market, such as the S&P 500 Index Fund. Similarly, each firm also charges a certain percentage of your balance toward management fees. Without proper research, these fees can really cut into your gains over time.
Because each firm has its own risk profile and management fees, it is important that you shop around to find the one that best fits your needs and risk tolerance.
Retirement planning takes advantage of the principle of compounding interest. You can maximize on this concept by having your investments consolidated into as few accounts as you feel comfortable with, which may even be just one. This consolidation can also reduce the amount of fees you pay management firms for managing your funds. However, depending on your risk profile, you may want to consider some diversification.
Timing (Especially If You Are Cashing Out!)
The speed with which you have to make a decision about rolling over your old 401(k) or employer-sponsored retirement plan has a lot to do with how the money is being held for you. If the balance of your account is issued to you as a lump sum in the form of a check or if you request one yourself, according to IRS rules, you only have 60 days to roll it over to a new employer-sponsored retirement plan or invest it yourself in an IRA. If you don’t, you will face additional federal income tax liabilities, depending on your tax situation, and you could see extra “early withdrawal” penalties.
If your balance is continuing to be held in your previous account, then there is usually no deadline for when you have to decide to move the money. However, you should still consult the plan’s guidelines for any other specific requirements or conditions.
Take the Next Step
We know there are a lot of demands on your time and energy, especially when you have just made a career change. But taking the time to prioritize your retirement planning can pay off big-time in the long run.
If you need help with any of the decisions or steps involved in managing your retirement, we hope you consider reaching out to one of our professionals here at Harvest Wealth Group. We hope to build long-term relationships with each of our clients, and we work to balance your goals with your financial situation to help you enjoy the moments that matter, now and in the future.
About the Author
Garrett German* founded Harvest Wealth Group with the aim to create a meaningful experience that will impact his clients, in a significant way, both personally and financially. After your first meeting with our team, you’ll be on your way to financial clarity and confidence.