There was a time where the average worker would stay with a company upwards of 40 years. A worker would get a job at a company when they became of age and 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 than that of our parents and grandparents’ work environments. Hiring from within is not often a given in a company and therefore, employees must seek advancement outside of their company just to feel as though they have accomplished something in life.
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 important, and your 401k is a significant step in you reaching your retirement goals. For those that are seeking new employment or have procured a new employer, here are some ways you can manage your 401k received from your previous employer, and how to optimize it moving forward.
Keep Your Money Where It Is
Even if your previous employer and you are not on good terms, they do not have the legal right to your 401k account. If you have at least $5,000 accumulated in your 401k 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 401k account, and your previous employer can potentially charge you extra maintenance fees on the account. To guard against any unforeseen issues, be sure to know the rules of your company’s policy regarding your 401k before leaving.
Roll into the New Employer’s 401k Option
With the way people change jobs today, there are very few employers that do not have an available rollover feature in their 401k options. It is important to weigh your options regarding the new company.
Your old plan might have better investment benefits, but it is 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 the sake of simplicity.
Either way, make sure you get an analysis of your 401k to make sure you aren’t paying any extra fees or have it poorly allocated. Blooom offers a free analysis of your 401k and other retirement accounts to make sure you’re getting the best return possible for your retirement.
Roll over into to an IRA
A 401k is an excellent opportunity to build up your retirement account, but it is not the only option available. With a 401k, your employer maintains control over 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 moved into an IRA. This called a 401k rollover, and investment experts often consider it the best option in these scenarios.
An IRA puts you in control of your investments. For those that keep their eye on the market, an IRA can be a useful tool and can save your thousands of dollars over a 401k. It is not for everyone, but if you want to take full control of your financial future and have the availability to name beneficiaries, an IRA is a great option.
If you don’t want to manage the investments yourself, you have the option of opening an IRA with a robo advisor such as M1 Finance, Wealthsimple, and Wealthfront, which will not only do all of the investment planning for you automatically, but also do all the work of rolling over your 401k into the IRA for you, for free. On top of that, M1 Finance’s investment service is completely free.
In the event that you have moved to a new company without the availability to roll over your previous 401k and you do not feel the need to have 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 that are 55 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 carry their own set of advantages and disadvantages. When moving to another company or starting your own business, each option should be weighed carefully. We live in an age where your financial future can quickly be placed in jeopardy if you make the wrong decision. But also, don’t panic, there is help out there.
Luckily there are also some great automated tools out there like Blooom, which gives you a free analysis of your 401k, IRA, and other retirement accounts to make sure you’re getting the most from your portfolio. Robo advisors like M1 Finance offer a wonderful free automated investing platform if you want to roll over your 401k into an IRA – they’ll do it all for you and invest the money for you – all on auto pilot.
Take some time and make an informed decision as to what is right for 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.