Starting a new job or retiring can be exciting but also anxiety-inducing. As you begin a new chapter of life, the last thing you want to worry about is what do with your 401(k) or 403(b) from your previous employer. Everence® can help you make a decision that puts your financial well-being first.
Here are five options for what to do with your accumulated retirement savings, which we break down for you –
1. The easiest option is to leave your money in your previous employer’s plan. While this may be a stress-free option, it’s not necessarily the most beneficial for your retirement savings. Your assets will continue to grow tax-deferred until you begin taking distributions, however you now must worry about maintaining two accounts – one at both your new and old employer.
2. If you’re changing jobs, you can roll over the assets to your new employer’s retirement plan, if one is available and rollovers are allowed. This might be a good option for you, especially if your new employer’s investment options are better than what you had in your old employer’s plan. It is important to understand the fees you were paying – including the expenses of the funds – when you are considering your new plan. If the fees are lower in your new plan, it makes sense to roll over your existing assets.
3. You can maintain the tax-deferred status of your retirement account by making a direct rollover to an individual retirement account (IRA). This is a great option if you’re eventually looking to consolidate all your retirement savings. An IRA will also give you more flexibility in investing and receiving distributions than your employer’s retirement plan. Though, something to keep in mind is that an IRA may have higher investment fees. Additionally, your new employer’s plan might offer matching contributions – something you can’t get with a traditional IRA.
4. Depending on your tax situation, you might want to consider converting some or all your tax-deferred assets in the retirement plan to a Roth IRA. Distributions from Roth IRAs are tax-free (including earnings) if taken after age 59 ½ and the account is at least five years old. There’s also no requirement that distributions must be taken at age 70 ½. However, the amount converted to a Roth IRA is taxed in the year of conversion. In addition to paying taxes, the additional income may push you into a higher tax bracket in the current year.
Note: Whether you roll over your assets into an IRA or your new employer’s retirement plan, you’ll likely want to consider a direct rollover. This is when one financial institution sends it directly to your new financial institution.
5. You can also cash out the account value, meaning you can access your money and use it however you’d like. However, cashing out your balance could negatively impact your ability to support yourself and your loved ones during retirement. The entire distribution is subject to income taxes and possibly a 10% penalty tax. Your previous employer is also required to withhold 20% of the distribution as prepayment of federal income taxes.
Still not sure what decision is best for you? An Everence representative can help you consider your options. Connect with us to learn more.