Historically, it wasn’t uncommon for employees to work at the same job or company for most of their lives. But a cultural shift took place after The Great Recession,and workers became more likely to switch jobs and companies multiple times throughout their career. Last year, 21% of Millennials reported recently changing jobs. Another 60% of Millennial employees are expecting to change position within the next 12 months.(1)
The decision to change jobs isn’t always a simple one, especially if you have money tied up in a 401(k). Those who are in the midst of switching jobs commonly ask Osiwala Financial Group advisors what to do with their 401(k). Here are some options.
(1) Keep Your 401(k) Where It Is
If permitted, you can leave your money within your 401(k) plan at your previous employer with the hope of continued growth. While you cannot continue to make contributions, you can continue to manage the money and make investment decisions. This is a choice you might make because you’re familiar with the platform, and you want to diversify your assets. But if you choose to keep your money where it is, check and see if there is a minimum balance you must maintain (it’s typically $5000). It’s also vital to research fees and investment options if you need to access the money in the future.
(2) Roll Your 401(k) Into Your New Employer’s Plan
You can often roll your old 401(k) into your new employer’s plan. Many people find it easier to manage one account than multiple accounts at different companies. Additionally, your new job’s retirement plan has other investment options and perks that you didn’t have before. It might be a good move to transition to your new employer’s plan.
Before rolling it, you’ll want to check to see if there is a waiting period and any differences in your investment options and fees. This is especially true if you’re considering rolling a Roth 401(k).
(3) Roll Your Money into an IRA
Much like a 401(k), an individual retirement account can stay independent of an employer. The main benefit if rolling your money into an IRA is better money access. You may incur income taxes and early withdrawal penalties if the assets are not transferred directly and you are under 59 ½. If this option is one you are considering, you’ll want to research the difference in investment options and fees between an IRA and your employers’ (past and present) 401(k) plans. This may be beneficial if you change jobs frequently or are hired by an employer that doesn’t offer a retirement plan(s).
(4) Take the Cash
While this option may seem tempting, taking the cash out of your retirement account may have costly tax repercussions. Cashing out will cause those funds to be considered taxable income, making them subject to an immediate 20% federal tax withholding. Additionally, you may incur a 10% early withdrawal tax penalty if you are under 59 ½.
The best advice we can offer when managing your 401(k) when you switch jobs is to do your research. There are several factors to consider. Is the company where you have your 401(k) in financial trouble? If the business closes, what happens to your retirement plan? Ultimately, you’ll want to choose an option that allows you to benefit from a tax-advantaged status while preserving and increasing growth potential.
Have questions about what to do with your 401(k)? The advisors at Osiwala Financial Group help clients every day in navigating any potential obstacles and decisions that could affect their future financial well-being. Click HERE to request a 20-minute “Ask Anything” consultation with one of our advisors. The appointment is free and can be done by phone, virtually, or in our office. If you prefer to schedule your appointment by phone, call us at (248) 828-8000.