When I Change Jobs, What Should I Do with My 401(K)?

If you are considering switching jobs to improve your financial status, that is understandable. Just make sure you know what impact your leaving will have on your retirement funds.  For example, your 401(K). The wrong decisions now could end up costing you thousands of dollars in future employer matches, taxes, and maybe even penalties. That relatively small pay raise might not be worth the devastating effect the move could have on your retirement.

Here are some things to think about before you make that important decision:

Check on your employer’s vesting schedule

If your employer is matching the amounts that you contribute to your 401(K) plan, those funds are typically not completely yours for several years. In other words, if you leave before you are 100% vested, you will forfeit some of the 401(K) funds that your company contributed. Keep in mind that any funds that you contributed through payroll deductions are always 100% vested, no matter where you work.

Here is an example of a typical vesting schedule:

  • After one year of service: 0% vested
  • After two years of service: 20% vested
  • After three years of service: 40% vested
  • After four years of service: 60% vested
  • After five years of service: 80% vested
  • After six or more years of service: 100% vested

Under this schedule, if you had saved $20 per week for two years, you would have $2,000 toward retirement. If your employer matches dollar-for-dollar, you would have another $2,000 in your account. If you decide to quit, however, you would only receive $400 of your employer’s contribution. That’s a $1,600 impact that changing jobs would have on your future retirement savings!

Consider your options carefully

Most workers have four options for their 401(K) when they leave a company:

  1. Cash out: This option should be off the table for you. You will owe taxes and penalties, plus you will immediately be pushed into a higher tax bracket. You will be lucky to walk away with half of your money!
  2. Leave the money where it is: If the investments in your current plan are performing well and the administrative costs are reasonable, this might be a viable option. But while it is better than cashing out, leaving your 401(K) with a former employer will rob you of a certain amount of control. There are better options.
  3. Rollover into your new employer’s qualified retirement plan: If your new employer offers a 401(K) plan, they will likely accept a direct rollover from your previous plan. You might have to leave your funds in your old plan until you are eligible under the new plan, but many will allow rollovers immediately. Just make sure this is a plan-to-plan transfer and the money is not sent to you. It creates all sorts of complications that a true rollover avoids.
  4. Rollover into your IRA: This is your best option for a host of reasons, not the least of which is the freedom to choose from a variety of investments not always available in company retirement plans. By using a Self-Directed Rollover IRA, for instance, you not only choose from common stocks, bonds, and mutual funds but also from real estate, private stock, precious metals and other alternative assets. Not only that, but you avoid the high administrative fees that can stunt the growth of your retirement savings. And you make the decisions on which investments are right for you.

It’s up to you

The financial fallout from changing employers might be significant, but there is no reason to compound the consequences by making poor decisions with your 401(K) funds. The money to which you are entitled is not a short-term windfall but a long-term investment in your future. Approach it that way!

Take control of your 401(K) funds when you leave your job

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.

What Mistakes Millennials Make When They Should be Rolling Over Their 401(K)

Getting an early start on saving for retirement is critical. If you do not believe this, here is an example:  A 22-year-old worker earning $40,000 starts saving 6% of that in a 401(K) while the employer adds another 3%. Assuming a 6% rate of return, that person will have accumulated $827,000 by the time retirement rolls around at age 67.

If that same worker waits until age 30 to start saving, that same annual contribution of $3,600 will have grown to $490,000—that’s $337,000 less!

When it comes to accruing a substantial retirement nest egg, time can be even more important than the type of investments you choose. Those eight years from the previous example can never be recovered, so it is crucial not to waste them.

The time to Rollover the old 401(K) is now!

Many millennials are missing out on saving for retirement during these all-important early years on the job. By the time they have reached the age of 32, the average millennial will have had four different jobs—and over 20% of them have changed jobs in the past year! That rate is three times higher than earlier generations.

While living for today and disregarding the future might seem to make sense to a twenty-something, that same person could be filled with regrets when it is hard to make ends meet in retirement. This short-sighted philosophy can result in millennials cashing out their small distributions and paying the taxes and penalties they owe.

Worse yet, many of them, believing the paperwork is not worth the effort, abandon their 401(K) plans as they move on to the next job. In doing so, these young workers are missing out on the magic of compounding, as even the smallest accounts can grow to be substantial amounts.

Here’s another example:

A young worker decides to change jobs at the age of 26, having accumulated $7,000 in a 401(K) over four years of work. That amount does not seem significant enough to make a difference, so the worker cashes in and puts a down payment on a car. After paying taxes and penalties, there is about $5,000 to put toward the car.

If that same worker rolled that $7,000 into an IRA and allowed it to grow at a 6% rate of return until retirement, it would be worth over $81,000 and that car would have been long forgotten!

It is easy to roll over a 401(K) managed by your former employer to either a plan at your new company or to your IRA. And even if it is a bit of a hassle, the previous example should convince you that your efforts will be handsomely rewarded.

Some millennials opt for an indirect rollover

It sounds like a good idea on the surface. The indirect rollover allows you to receive a check when you leave your job and then roll the proceeds into another 401(K) or IRA at a later date. But this method is fraught with complications: You have the responsibility of getting this money to the right place, and you must do it within 60 days. If you cannot manage that, you will be hit with taxes and penalties.

One more reason to stick with a direct transfer: Your old employer is required to withhold 20 percent from your distribution for income taxes, so to keep from having to pay taxes and penalties on that 20%, you need to come up with that amount for the rollover and wait until you file your taxes to get back the withheld amount.

Possibly the biggest mistake millennials are making

As mentioned, many younger workers believe that retirement is a long way off and they need not concern themselves with it just yet. As a result, they choose not to participate in their employer’s 401(K) plan, and they miss out on those essential early years that allow compounding to begin sooner and turn small amounts into substantial savings at retirement.

Contributing to an employer’s 401(K) is the best way to put retirement savings on auto-pilot and save money on taxes right now. Once the plan is set up, you can begin to revolve your budget around the new net pay. Most people don’t notice the difference in their paychecks after a few weeks, but after a few years, they will be paying attention to that growing sum of money in their retirement account.

When you get right down to it, the biggest mistake the younger generation is making is not having anything to roll over when they hop to their next job.

Interested in learning more about Self-Directed IRAs?  Contact American IRA, LLC at 866-7500-IRA (472) for a free consultation.  Download our free guides or visit us online at www.AmericanIRA.com.