What to do with Your Old 401(k) When Changing Jobs

401k

When you are looking forward to a new job, your retirement savings plan is typically not the first thing on your mind. However, for many of us, an employer-sponsored 401(k) is one the biggest and most financially beneficial perks of a job. Your 401(k) is your future. It is a huge factor in your ability to retire when you are ready and live comfortably in your golden years. That being said, what happens to your old 401(k) when you leave your current job? The best decision will often depend on your specific financial circumstances. Here, we look at the four options you have for your 401(k) when you are starting a new job.

1. Leave it

Of all the options available to you, leaving your 401(k) where it is with your previous employer is the easiest option. The money in your account will continue to grow tax-deferred and be available to you upon retirement. If the plan comes with low fees and good investment options, you may want to stick with it. There are some cons to keeping your 401(k) with your previous employer. Depending on the employer, you may not be able to make additional contributions, take a plan loan, or make a partial withdrawal once you leave. Some employers will charge higher fees if you aren’t an active employee. There is also the risk that you could miss important updates about your plan, or forget about the account entirely. This option will highly depend on your individual circumstances and the details of your former employer’s plan.

2. Roll it into your new plan

While this may not be an option with all plans and every place of employment, this option will allow your retirement savings to continue growing, tax-deferred. You will be allowed to make contributions to the account, typically after a mandatory probation period ends. If your new employer has a better plan (lower fees, better investment options, etc.), it might be worthwhile to take your money with you. There are two ways you can roll your old 401(k) into your new one:

  • Direct rollover: The administrator of your old plan transfers the money directly into your new 401(k) account.
  • Indirect rollover: The administrator of your old plan transfers the money directly to you. Then you must manually apply the money to your new account. This option is typically for people who are in need of a short-term loan. Your employer will withhold 20% for taxes in case you decide to keep the money outright. If you add the money to your account in full within 60 days, the 20% will be returned to you when you file your tax returns.

3. Roll it into an IRA

Instead of rolling over your savings into another 401(k), you could put those funds into an individual retirement account (IRA). Because this account does not have to be connected to an employer, it is a great option for those leaving their job to go back to school, become stay-at-home parents, start their own business, or for those who do not have access to another 401(k). The money can be sent directly or indirectly, only this time you will not have to pay taxes like you would with a 401(k) or a Roth IRA. With an IRA, your money will be able to grow tax-deferred and you will have access to a wider variety of investment options than with a 401(k). An IRA also does not require you to pay fees if you withdraw your money for college, to buy your first home, or to pay off medical debt.

4. Cash Out Your 401(k)

When it comes to deciding whether or not to cash out your 401(k), it really depends on you and your specific circumstances. Most financial planners and asset protection attorneys will advise against it; taxes and penalties will cause you to lose a big chunk of the money you and your employer have invested. However, you know your financial situation best. You may need a big lump of cash to go back to school, as an emergency fund when one parent decides to stay home with the kids, or to start your own business. If you are considering cashing out your 401(k), you MUST make sure you understand what it will cost you.

When you cash out your 401(k), your employer will typically withhold 20% of your balance to pay off the IRS. You will also have to pay state taxes and, if you are under 59 ½, a 10% early withdrawal fee. It is also important to understand that by cashing out this money early, you will be missing out on the money your account could be making in the years between now and retirement. A 401(k) with $50,000.00 when you are 35 will turn into $216,000 by the time you retire at 65. If you were to cash out this 401(k) now, after taxes, fees, and penalties, you would receive approximately $35,000.

Veitengruber Law has experience providing long-term planning guidance at any stage in your career. Protecting your assets and preparing for retirement will look different for every client. We offer personalized strategies to help you make informed decisions about your retirement goals.

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4 Ways to Start Building Your Savings

how to build your savings

For a lot of people, the idea of having any money to save can be laughable. When you’re working paycheck to paycheck and struggling to make ends meet, it might seem impossible to put any amount of income away for the future. After all, what is the point of saving $5? But saving any amount of money is worth it. Studies have shown that having even $500 in savings can help immensely in the event of an emergency. So while the standard advice for a savings goal is six months of living expenses, every little bit helps. If you are new to saving money, or recently had your savings drained, here are a few ways to build your savings account or emergency fund.

1. Pay Yourself First

Whether you are building your savings account for a big purchase, to fulfill a life goal, or for retirement, the best way to achieve your savings goals is to pay yourself first. A lot of people make the mistake of trying to save the money they have left over at the end of the month—and often find they don’t have any money to put towards their savings accounts. Before you have the chance to spend the money on anything else, put it into a designated savings account.

In order to make sure you pay yourself first, you must get a good handle on your budget. If you can determine what your income and expenses are, you will have a better idea of how much money you can safely put towards savings every month. A budget will allow you to be realistic about your savings goals, while also curbing your excess spending. For example, if you notice you are spending a lot of money eating out, make an effort to cook at home more often and then put the extra money into savings. Every little bit does matter! When creating your budget, make savings the ultimate goal and allow your spending choices to reflect that goal.

2. Make Building Your Savings a Habit

Another good way to build your savings is to make it a habit. It matters less how much you are saving each month; it’s more important that you are consistently depositing money into your savings account. A great way to do this is to set up an automatic deposit. Most banks will let you automatically deposit a set amount of money from your checking account into your savings account on a specific day of your choice. The first few days after pay day is a good automatic deposit day. With automatic deposits, you may not even notice the money is missing from your checking account in the first place. As this “habit” will largely go unnoticed, making it a very easy way to save!

3. Look for Sneaky Ways to Save Even More Money

After you have been saving for a while, you will have a good idea of your income, expenses, and budget. At that point, you should critically examine your spending to see where you could eliminate expenses in order to allocate even more of your income to savings. It is always a good idea to put “extra money,” like bonuses or tax refunds, into your savings. Make sure you are taking full advantage of your employee benefits. If your employer offers transportation reimbursement, matching retirement savings plans, or insurance, you can save money by taking advantage of these benefits. If you are job searching, look for employers who can help you achieve your financial goals.

4. Create a Separate Emergency Account

Once you have an established savings account, it might be a good idea to consider a separate savings account labeled as an emergency fund. Having an emergency fund that is separate from your savings account can ensure that even when facing an unfortunate financial event, you won’t lose all of your savings in the process. With a savings account and an emergency fund, you can plan for unforeseen medical expenses or an unexpected car repair while still putting money away for your future.

Saving money can give you peace of mind and a sense of financial security. Knowing you have the financial resources to get through some of life’s many hurdles is a powerful feeling. Every dollar you put into savings is an investment in your financial future. Everyone has to start somewhere, so start saving today!