If you’ve contributed to your former employer’s 401(k) plan, you understand the importance of saving and the benefits of this type of investment. Now that you’ve left your former employer and can no longer make tax-deferred contributions, you have an opportunity not only to address what you’d like to do with this particular retirement account, but to review your entire retirement strategy. Even though the best overall strategy is to continue to save, there are a number of options to consider regarding the way you save, and for how long.
Understanding Your 401(k) Options
Once you leave your former employer, you have four main choices to consider when determining what to do with your 401(k).
• Leave your money in your old employer’s plan. You don’t have to do anything. You can leave your money in your old employer’s plan and put any immediate decisions on hold. This might appeal to those who don’t want to lose the mix of investments they currently have. On the other hand, your 401(k) plan account must be worth at least $5,000 to be eligible to do this, your investment options may be limited, and you can’t make any additional contributions to the plan. If your account is valued at $5,000 or less, your former employer may require that your account be distributed or rolled over to an IRA.
• Move your money to a new employer’s plan. You may have the option of transferring the funds directly into your new employer’s plan. Most of the time, the investment options are different, so you’ll need to take a careful look at how your money was invested in your old plan when choosing the mix in your new plan. But you can use this opportunity to choose a mix that is more to your liking.
• Receive a distribution. You may consider receiving a distribution from your former company’s 401(k) savings when you leave that company. There may be substantial income taxes to pay, as well as additional penalties if you’re under age 55. Plus, the distribution might push you into a higher tax bracket for the year. Finally if you take and spend your 401(k) savings today, you’ll have less to retire on later.
• Roll your money over into an IRA. A rollover IRA is designed to defer taxation on distributions until withdrawals begin. No taxes are paid on any earnings within the account until funds are distributed to you. As funds are withdrawn from a rollover IRA, they’re taxed at your ordinary income tax rate. Since you pay no current taxes, the entire rollover amount may be put to work for you. The rollover account allows your assets and any earnings an opportunity to grow tax-deferred until distributed. This tax deferral can be a very valuable advantage. Also, a rollover IRA will often offer you greater investment flexibility than an employer’s 401(k) plan. IBI