What is the Safest Place to Move 401k Money After Changing Jobs?
After switching jobs, there are four options for moving 401(k) money: leave it where it was before, roll it over into a new plan, transfer to an IRA account or cash out.
Remaining invested in an old plan could save on fees; however, doing so may also result in forfeiture of net unrealized appreciation (NUA) on company stock.
IRAs
IRAs provide millions of Americans with an effective retirement savings tool. Offering greater flexibility than 401(k) plans with lower fees, and generally adhering to IRS rules regarding accounts at various financial institutions – making IRAs ideal for people changing jobs or careers.
Once you leave a job, there are four choices for how you should handle your 401k money: transfer it into the new employer’s plan, move it to an IRA, cash out or leave it where it is. Rolling it over into an IRA provides more investment choices while making keeping track of all your assets easier.
Avoid cashing out your 401k as this would constitute a distribution and may incur income and penalty taxes. Annuities offer another viable solution, although be mindful that they have their own set of risks; prior to making this move it would be prudent to consult a trusted advisor as annuities are not protected against legal judgements and creditors may gain access if bankruptcy occurs.
401ks
401ks are popular retirement accounts, but they’re not your only way to save for the future. There are other tax-deferred investments like Individual Retirement Accounts (IRAs) and Simplified Employee Pension (SEP) IRAs as well as Savings Incentive Match Plans for Employees (SIMPLE IRA). When changing jobs or retiring early, your old accounts can easily be transferred over to these other forms.
You can transfer your 401k balance directly from one employer’s plan to the next by requesting a trustee-to-trustee rollover, but first check with your new employer if this type of transfer is accepted and how it’s managed. Make sure that traditional funds go into a traditional IRA while any Roth funds should go straight to a Roth IRA account for optimal results.
As you approach retirement age, it can be wise to diversify into lower-risk investments in order to protect the value of your 401k and avoid too much financial loss during recessions or bear markets. Speak with a financial advisor about moving to bonds, money market funds or target-date funds as safer choices; but if you are still young (in your 20s or 30s), doing this could result in lost wealth-building opportunities should stocks rebound quickly.
IRA rollovers
When switching jobs, your options for your old employer’s 401(k) include leaving it where it is and paying taxes and an early withdrawal penalty; rolling it into your new employer’s plan if possible; cashing out; or rolling your funds over into an IRA for long-term investing – plus more choices than most company 401(k) plans offer.
When rolling over retirement accounts, it is essential to follow Internal Revenue Service (IRS) regulations. A direct rollover may be the safest approach – in this case, your old retirement account administrator sends you a check with no withheld taxes and you deposit that full amount into your IRA within 60 days to avoid tax consequences.
Other ways of rolling over your 401(k) include an indirect rollover, whereby you receive a check and deposit it directly into your IRA yourself. While this requires more paperwork, it could make sense if you wish to maintain the investment options available from your previous employer and gain access to more mutual funds. Alternatively, you could roll your IRA over into an investment account managed by an automated advisor that selects investments on your behalf; although this option might save time but decrease your returns.
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