What Can I Transfer My 401k to Without Losing Money When I Change Jobs?

As soon as you leave a job, there are various options for your 401(k). You could either leave it where it is, roll it into your new employer’s plan or an IRA, or cash it out.

Follow transfer rules carefully; failing to do so could incur additional taxes and penalties. Here are four things you should keep in mind before moving your 401(k).

IRAs

If you’re changing jobs, the first few weeks can be overwhelming with meetings and training sessions. With all these new faces around you it can be hard to keep track of them all; but one important fact should remain true: your old employer-sponsored retirement accounts can be converted to individual retirement accounts (IRAs) without incurring any losses in value.

Direct transfer rollover is the optimal method for moving funds over, as this entails your 401(k) administrator sending you a check payable to your new IRA and providing 60 days to deposit all the funds and avoid income tax implications.

Rolling over an IRA into a better plan may save money on fees while helping preserve tax-free withdrawals during retirement. However, this may not be the best decision if your new employer provides subpar plans – Bankrate suggests moving instead to self-directed brokerage or robo-advisor which may offer lower fees and more investment options.

401(k)s

Your 401(k) can stay with you when changing jobs, provided it is done the correct way. A direct rollover may reduce taxes and fees. Working with a financial advisor will help determine the optimal solution for you and your situation.

Maintaining your funds within an employer plan could be advantageous if it offers reasonable fees and appropriate investment options; however, an early withdrawal tax penalty of 10% could apply if you are under 59 1/2.

Rather than withdraw your savings directly, transferring them first into an individual retirement account (IRA) could help avoid an early withdrawal tax penalty of 10% while maintaining tax deferral benefits. Furthermore, IRAs often provide greater investment choices and reduced costs than employer-sponsored plans; speaking to a financial advisor will assist with understanding all rules related to IRAs as well as selecting one most suited to your needs.

403(b)s

When switching jobs, one option for consolidating your retirement savings may be rolling over your old 401(k) into your new employer’s 403(b). But before making this decision, be sure to carefully compare costs associated with each plan; many 401(k) plans come with high fees that can reduce retirement savings significantly; these costs are sometimes hidden within their fee disclosure statement and difficult to calculate and compare directly.

A 403(b) retirement plan provides non-profit organizations and educational institutions with employees a means of contributing through salary reduction agreements that reduce wages in exchange for investments chosen by each employee. Employee contributions are made via salary reduction contracts which reduce wages before channeling them toward investments of their choosing. Contributions are exempt from being taxed as income. Employees can also save additional funds through the 403(b)’s bonus catch-up contribution, which allows employees who have worked for 15 years at eligible organizations to make extra contributions of $3,000 annually, with no tax liability and lifetime maximum limit of $15,000. You may convert to an IRA at any point without incurring tax liability; however withdrawals made prior to age 59 1/2 will incur a 10% penalty fee.

Taxes

When switching jobs, your 401(k) savings have multiple options for distribution. You could cash out the funds, roll them over into your new employer’s 401(k), or transfer them directly into an individual retirement account (IRA). A direct rollover – in which your former employer cuts a check directly to you with instructions for depositing into an IRA or 401(k). Direct rollsovers help avoid federal and state income taxes as well as withdrawal penalties of 10% under age 59 1/2.

One advantage of rolling over your 401(k) into an IRA is having all of your retirement savings in one place, but your new IRA may not offer all of the same investment options that were available through your former company’s plan. Furthermore, should you transfer it into another employer’s 401(k), its rules regarding investment options and fees will likely apply instead.


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