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There was a time when the average worker would stay with a company for over 40 years. Workers would get a job at a company when they came of age. Due to loyalty and the fact that most companies offered advancement opportunities from within the company, most people would work and eventually retire with full benefits.
Today’s world is vastly different from our parents’ and grandparents’ work environments. Hiring from within is not often a given in a company. Therefore, employees must seek advancement outside their company to feel they have accomplished something.
Part of advancing to a new company is figuring out what to do with our old retirement accounts from the previous employer. Your financial future is essential; your 401(k) is a significant step in reaching your retirement goals. For those seeking new employment or who have procured a new employer, here are some ways to manage your 401(k) received from your previous employer and optimize it moving forward.
Keep Your Money Where It Is
Even if you and your previous employer are not on good terms, they do not have the legal right to your 401(k) account. If you have at least $5,000 accumulated in your 401(k) account, you have up to 90 days, depending on the policies of your previous employer.
The main disadvantages to this option are that you may not have full access to change certain aspects of investments within your 401(k) account. Your previous employer can potentially charge you extra maintenance fees on the account. To guard against any unforeseen issues, know the rules of your company’s policy regarding your 401k before leaving.
Roll into the New Employer’s 401(k) Option
With the way people change jobs today, very few employers do not have an available rollover feature in their 401(k) options. It is essential to weigh your options regarding the new company.
Your old plan might have better investment benefits, but, likely, you will closely watch the old account as you would with the new one. It is often better to roll over the old account into the new one to streamline accounts for simplicity.
Either way, ensure you get an analysis of your 401(k) to ensure you aren’t paying any extra fees or have it poorly allocated.
Roll over into an IRA
A 401(k) is an excellent opportunity to build up your retirement account, but it is not the only option available. With a 401(k), your employer controls investments and changes to the account. This is generally not a problem if you maintain employment with the company, but upon moving to another company or, in the instance of starting your own business, your money can be rolled into an IRA. This is called a 401(k) rollover, and investment experts often consider it the best option in these scenarios.
An IRA puts you in control of your investments. For those who keep their eye on the market, an IRA can be a helpful tool and save thousands of dollars over a 401(k). It is not for everyone, but if you want to take complete control of your financial future and have the availability to name beneficiaries, an IRA is a great option.
Suppose you don’t want to manage the investments yourself. In that case, you have the option of opening an IRA with a robo advisor such as M1 Finance, Betterment, and Wealthfront, which will not only do all of the investment plan for you automatically but also do all the work of rolling over your 401(k) into the IRA for you, for free. On top of that, M1 Finance’s investment service is entirely free.
If you have moved to a new company without the availability to roll over your previous 401k and do not need an IRA, you can cash out your account. You can use that money to pay off any lingering bills or start your own business, but you will face certain penalties.
For those 65 years or older, you will not have to pay early withdrawal penalties, but you will have to pay income taxes on the money taken out. Another drawback is that you could completely wipe out your retirement nest egg.
Cashing out is usually considered a last resort and is not recommended.
Each one of these options carries its own set of advantages and disadvantages. Each option should be weighed carefully when moving to another company or starting a business. We live in an age where your financial future can quickly be jeopardized if you make the wrong decision. But also, don’t panic; there is help out there.
Luckily, some great automated tools give you a free analysis of your 401(k), IRA, and other retirement accounts to ensure you get the most from your portfolio. Robo advisors like M1 Finance offer an excellent free automated investing platform if you want to roll over your 401(k) into an IRA – they’ll do it all for you and invest the money for you – all on autopilot.
Take some time and make an informed decision about what suits you. No two situations are ever exactly alike, so weigh the pros and cons of each option and possibly talk to a financial advisor before making any rash decisions.