Dear 3Rivers: HELP! I Left My Job - What Happens to My 401(k)?
Dear 3Rivers,
I’ve just left my job of over five years – where I had been contributing to that company’s 401(k) plan. I have saved over $10,000 and now I’m not sure what to do. Should I pull that money out and place it into a savings account at the credit union? It’s still my money, right? What are my options? What happens when I get another job and start a new plan – can I somehow combine the two? I’ll admit: I didn’t read the fine print when I signed up and now I’m totally lost. HELP!
Sincerely,
Scared for My Savings
Scared,
First off, take a deep breath. You’re one of millions who have started a 401(k) at an employer you didn’t stick with. The most important thing to note: The money that YOU contributed is YOURS. You earned it. The money contributed by your employer, however, might not be. Plans vary from company to company, and some require you to be employed a set amount of years before you’re granted full ownership of what they’ve provided to your 401(k).
Pulling your 401(k) out and placing it in a savings account should be your last resort – when money is placed in your 401(k) from your paycheck, it is not taxed first, which is a huge benefit. If you dip into your 401(k) too early or withdraw it from the account, it will be subject to tax and you’ll lose a great deal of it. Scarily, 40% of people between the ages of 20 and 39 who switch jobs just withdraw their 401(k) without taking advantage of other alternatives. In 2011, the Internal Revenue Service collected $5.7 billion in early withdrawal penalties! Cringe-worthy.
Luckily, you've got options to consider before making that move.
Roll your balance into an IRA.
An IRA often offers a wider variety of investment options than a company 401(k). In addition, you’ll be able to consolidate your savings with other investments. Consider making this switch if you haven’t yet found a new job, or your new job’s 401(k) plan is less beneficial than your previous company’s or sub-par to the IRA account you’re considering. What’s the difference between a Traditional IRA and a Roth IRA? Find out here.
Roll your balance over to your new employer’s retirement plan – if it’s allowed.
If you do land a new job that offers a retirement plan, investigate what it has to offer and determine whether or not it’s your best option. You might consider going this route if your new employer’s plan offers solid, low-cost investment options, or there is an opportunity to consolidate company retirement accounts.
Leave your balance in your former employer’s plan.
Because you have over $5,000 saved, your employer is required to allow this. Had you saved less than $5,000, they could force you to move it elsewhere. You might want to consider this option if the plan offers solid, low-cost investment options, you get a new job and would want to carry the balance over to your new company’s plan. If the plan offers less than stellar investment options or charges pricey fees – some of which you may not even be aware of – you might want to consider rolling the savings over into a new plan. Keep in mind that you’ll still be subject to that employer’s 401(k) plan rules – you’ll have limited control and fewer options should you keep it there.
Withdraw your funds.
Again, this should be a last resort. If you’re under the age of 59 1/2, you’ll likely be subject to a 10% tax penalty as well as any ordinary income-tax rates that weren’t applied before the money was placed into the 401(k). Even if you’re hurting for money, dipping into your retirement savings should be the absolute last move you make. Take some time to review your options and meet with one of our 3Rivers ClearFuture* financial advisors to help you determine which investment strategy is appropriate for you, consolidate your retirement savings into an all-in-one, easier-to-monitor account, and design a retirement plan that’s best suited for you, your family, and your future.
Sincerely,
3Rivers
Sources: US News, American Funds, Bloomberg, 3Rivers FCU