401K Rollover

Have you ever switched jobs?

1.  It is a very common situation that many people have faced at least once in their careers. Research shows that the average American employee switches jobs 12.3 times before retiring.

2. Changing jobs can mean that many Americans have old 401(k) plans, which may not be properly positioned to help them prepare for retirement, which leads to one question: What can you do to fix it? 

The good news is that there are many options at your disposal.

But how do you know which option is best for you? Each of these choices has advantages and disadvantages for you to consider, and that is where we come in. Bridger Financial Group can show you how to avoid common (and expensive) mistakes and how your 401(k) can play a key role in your retirement preparations.

If you are happy with your former employer’s plan, you might consider leaving your account behind. It’s important to remember that you don’t give up the right to move your account to your new employer’s 401(k) or an IRA at any time. However, you should be aware that there may be restrictions on your money. For example, you may not be able to take a loan from the plan. Also, some employers might charge higher fees if you are not an active employee. Choose this option if simplicity is your goal and you are happy with what you already have.

One of the best arguments in favor of rolling over your old retirement plan is that it can help simplify your life through more efficient organization. In our experience, investors tend to lose track of accounts that aren’t right in front of them.

Understandably, life gets busy, and failing to update your investment strategies to keep up with your needs can potentially undermine your long-term financial success. Putting your retirement money in one place can help ensure that your investments remain consistent with your financial goals.

If you are considering this choice, remember to take a look at your new employer’s plan before making the switch. First, make sure the new plan has the investment choices that you are looking for. Second, check out the fees associated with the new plan. And third, see when you can join the plan. In some instances, you have to wait until the next enrollment period.

You can elect to roll over your traditional 401(k) into a traditional IRA, which you can initiate by selecting an IRA provider and working with your 401(k) plan administrator. If the money is moved directly from your plan administrator to the IRA provider, no taxes are due on the assets that you move and any new earnings accumulate tax deferred.

You could select this option to preserve your assets’ tax-deferred status and avoid paying withdrawal penalties that would otherwise cost you money. You also get the benefit of having the option to consolidate other retirement accounts into this plan, as well as investment opportunities that possibly were unavailable with your previous 401(k).

Another option is to liquidate your old plan and receive the money directly. While it can be tempting to see your retirement savings as a quick source of cash, cashing out may result in penalties and taxes.

Be aware that your 401(k) plan administrator will withhold 20 percent of your current account balance to prepay the possible tax you’ll owe. Remember, your non-Roth 401(k) was funded with pre-tax dollars.  Also, if you are under 59 1/2, the IRS will consider your payout an early distribution and may assess a 10 percent early withdrawal penalty. All combined, you may pay up to 50 percent of your account balance in penalties and taxes.

As you can see, this option has many negatives for you to consider before you choose this path. This option is suboptimal for most situations because of the penalties you will face, but there are some instances when you may feel it is your best choice. Speak with your advisor and tax professional so they can best guide you.