Retiring or Changing Jobs? What Should You Do With Your 401(k)?

Retiring or Changing Jobs? What Should You Do With Your 401(k)?

If you’re planning to retire or change jobs in the near future, and you have a sizable balance in your current employer’s 401(k) plan, it’s important to decide what to do with the savings you’ve accumulated: Keep them where they are or roll them over into an IRA (or into a new employer’s plan). One thing you don’t need to do is rush the decision. Unless you have less than $5,000 in the plan, you can keep the funds there indefinitely —subject to required minimum distributions (RMDs) starting when you reach a certain age (73 or 75, depending on the year you were born). So, it’s a good idea to take your time to ensure that you choose the best option.

Here are some possible reasons to roll over the balance into an IRA:

  • An IRA would offer more diverse or higher quality investment options.
  • An IRA would offer lower fees and other costs.
  • You want to consolidate multiple retirement accounts into a single IRA to simplify management of your investments.

Reasons to keep the funds in a 401(k) might include:

  • Your 401(k) offers lower fees and a wider selection of investments than an IRA.
  • You plan to withdraw some of the money before age 59½. You can withdraw funds from a former employer’s 401(k) plan penalty-free starting at age 55, but if you roll over the funds into an IRA you won’t be able to avoid penalties until you’re 59½.
  • There’s company stock in your 401(k) account. If your 401(k) invests in your former employer’s stock, the stock may qualify for long-term capital gain treatment when it’s distributed. If you move the stock into an IRA, that tax advantage will be lost.

Previously, one disadvantage of traditional IRAs was that contributions had to cease once you reached age 70½. But legislation enacted in 2019 eliminated the age cutoff, allowing you to continue contributing to a traditional IRA so long as you continue to work and receive earned income.

If you’re changing jobs, there may be a third option: Roll the funds into your new employer’s 401(k) plan, if it has one. When evaluating this option, the same considerations regarding cost, investment selection, and company stock come into play. In addition, it may be advantageous if you plan to work well into your 70s. Some plans allow you to defer RMDs until you retire if you continue working (even part time) for the employer that sponsors the plan.

If you’re leaving, or recently left, a job and you’re unsure what to do with your 401(k), please contact us to discuss your options.

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