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Should I rollover my 401(k) to new employer is a common question those changing jobs want to know. When you first started working, you probably didn’t care about matching contributions from your employer. But as you get older, you realize how important these benefits are.
As you get closer to retirement age, you should consider rolling over your 401(k) plan to a new employer match program. This will help you save even more money while also increasing your chances of hitting your financial goals.
But before you roll over your 401(k), make sure you understand the pros and cons of each option. In this post, we’ll go over the three most common types of employer match programs and explain why you might choose one over another.
Changing Jobs: Should I Rollover My 401(k) to New Employer?
It’s never easy to change jobs, especially when you’re just starting out. But rolling over your 401(k) into a new employer’s plan could save you money in taxes, fees, and penalties.
There are two main reasons to roll over your 401(k): saving money and avoiding tax penalties. When you transfer your account to a new employer, you’ll avoid paying taxes on earnings until you withdraw them. And since you’ll likely pay less in taxes now, you might as well put that extra cash toward retirement savings.
But there are other benefits to rolling over your 401(K). First, you’ll avoid having to pay early withdrawal penalties. These penalties apply to withdrawals taken before age 59 1/2, and they can add up fast.
Second, you’ll avoid having your contributions taxed twice. Third, you’ll enjoy the convenience of automatic enrollment. Finally, you’ll have the option to contribute additional funds to your account.
So, whether you decide to roll over your 401k or not depends on your personal situation. Do you want to save money?
Are you worried about losing out on potential investment gains? Or maybe you’d rather continue contributing to your current plan. Whatever your reason, talk to your financial advisor to determine if rolling over your 401(k) is right for you.
In the meantime, here are a few options that you can use if you are on the fence about rolling over your 401k to a new employer.
1. Leave it in your current 401(k) plan
Rollovers are a common strategy used by employees who switch jobs. When someone leaves their job, they typically roll over their 401(k) into a new employer’s plan. While this sounds like a good idea, it could lead to problems down the road.
For example, if you transfer money from your old 401(k) account to your new employer’s plan, you might end up paying taxes twice.
First, you’d pay income tax on the amount transferred. Then, you’d pay another 10% federal tax penalty on the earnings portion of the funds.
This double taxation can result in a loss of retirement savings. So, while rolling over your 401(k) to a new employer can seem like a smart decision, it might not always be worth it.
2. Roll it into a new 401(k) plan
401(k) plans are retirement savings accounts offered by employers. These accounts allow employees to save money tax-free until they retire. While rolling over your existing 401(k) account into a new employer’s plan is easy, doing so could result in penalties.
For example, if you roll over your current 401(k) plan into a new employer’s 401(k), you’ll lose the ability to contribute to your own plan. Additionally, you’ll pay taxes on the amount rolled over.
There are two main reasons to avoid rolling over your 401(k). First, you’ll likely face a 10% penalty fee if you roll over your funds within 60 days of leaving your job. Second, you’ll be taxed on the entire amount rolled over.
To avoid these fees and taxes, consider taking advantage of a Roth IRA instead. With a Roth IRA, you’ll never owe taxes on contributions, and withdrawals are tax-free after age 59 1/2. Plus, you’ll still be able to contribute to your own account.
While a Roth IRA may seem like a better option, it depends on whether your current employer offers matching contributions.
If they do, then you might be better off sticking with your current 401(k). Otherwise, you’ll want to look into other options, including a traditional IRA.
3. Roll it into a traditional individual retirement account (IRA)
There are two types of IRAs: Traditional IRA and Roth IRA. Both allow you to save money tax-free, but each offers different benefits.
Traditional IRAs offer tax breaks, but they require you to pay taxes on withdrawals later on. Withdrawals are taxed as ordinary income rates, plus a 10% penalty.
Roth IRAs, however, let you withdraw earnings tax-free. But unlike traditional IRAs, you never pay taxes on contributions. Instead, you can withdraw earnings tax-free after five years.
So, which type of IRA would be best for you? Well, it depends on whether you plan to retire early or late. If you expect to retire within the next few decades, then a traditional IRA might be ideal for you. Otherwise, a Roth IRA could be a better option.
4. Convert into a Roth IRA
Rollovers are a common practice among Americans who are saving money for retirement. When someone opens a traditional IRA account, they deposit money into the account and then invest the funds over time.
At the end of the investment period, the investor withdraws the money and converts it into a different type of account.
This is called a rollover, and it allows investors to avoid taxes on their earnings. With a Roth IRA, however, the money never leaves the account. Instead, it grows tax-free until the investor decides to convert it into another kind of account.
There are pros and cons to both types of accounts, and it depends on whether you’re investing for short-term gains or long-term savings.
If you plan to retire within five years, a Roth IRA might be a better option. Otherwise, consider converting your traditional IRA into a Roth IRA.
5. Cash out
There are two main options for rolling over your 401(k): cash out and rollover.
Cash-out allows you to withdraw money from your retirement account immediately while keeping the rest of the funds invested until you retire.
With a rollover, you transfer the balance of your 401(k) into another plan offered by your employer.
What Happens If I Cash Out My 401(k)?
You must pay an additional 10 percent penalty if you take out any funds from your retirement plan before reaching the normal retirement date.
If you’re in the 24 percent income bracket, a $5K early 401(k) withdrawal will cost you $1,700 in federal and state taxes and fees.
You could possibly qualify for exemptions from the 401(k) penalty for early withdrawals. For example, if you lose or leave your job at age 55 or later, then you won’t have to pay the 10% penalty on withdrawals from the 401(k) associated with the job you most recently left.
How Do I Roll Over My 401(k)?
401(k)s are retirement plans offered by employers to employees who meet certain requirements. These accounts allow workers to save money tax-free until they retire, and then withdraw funds tax-free.
Rollovers happen when an employee leaves his or her job and continues contributing to the same account at another employer. When this happens, the previous employer sends the contributions directly into the new plan.
There are two types of rollovers: direct and indirect. Direct rollovers happen when an employee transfers his or her entire balance from one plan to another.
Indirect rollovers happen when an individual contributes less than $5,000 to the new plan, and the rest of the contribution amount is rolled over from the old plan.
For example, let’s say that Jane Doe quits her job and decides to contribute $10,000 to her 401(k). Her previous employer matches 100% of her contributions, so she puts $20,000 into her account.
Now, Jane wants to continue saving for retirement after leaving her current job. She could choose to transfer the full $20,000 balance to her new employer. Or, she could decide to put just $5,000 into her new account.
This second option would result in a partial rollover since Jane contributed $15,000 to her old plan. However, if Jane were to receive a match of 100%, she’d end up putting $25,000 into her new plan. Either way, she ends up with $25,000 in savings.
In either case, Jane still receives the matching contribution from her previous employer. And, if she ever retires, she’ll be able to withdraw the money tax-free.
Are There Any Downsides to Rolling Over My 401(k)?
Rollovers are a common practice among Americans who have retirement accounts. When someone receives money from another account, they usually roll it into their own IRA or another investment vehicle.
There are pros and cons to doing this, however. Some experts say that rolling over your 401(k) could lead to tax penalties, while others argue that it’s a smart financial decision.
Pros and Cons of Rolling Over 401(k) to a New Employer
Pros:
Employers match – Many employers offer matching contributions to employees who contribute to their retirement accounts. These matches can add thousands of dollars to your monthly income, making it worth considering whether to roll over your existing 401(k).
Rollovers happen automatically every year, so you don’t have to worry about missing out on the money. But rolling over your account could result in penalties if you haven’t contributed enough to your plan during the previous year.
So, if you decide to roll over your 401(k), make sure you save enough to cover the full amount of your contribution.
Also, consider the tax implications of rolling over your 401(k). Depending on your situation, you might be able to deduct part of your contribution from taxes. And if you’re eligible for a Roth IRA instead of a traditional IRA, you can avoid paying taxes altogether.
Tax savings – Rolling over your 401(k), 403(b), or 457(b) plan could save you money on taxes. Depending on your situation, you may qualify for a deduction or exemption on your federal income tax return.
Possibly Lower Costs -Saving money is always a good thing, especially since you probably won’t be able to deduct contributions from your 401(k). But rolling over your account could also save you money in other areas.
Fewer Rules – There are certain rules that apply to retirement accounts, including IRA and 401(k). But there are also exceptions to the rule, and sometimes it’s okay to break the rules.
For example, you can roll over funds into a Roth IRA account instead of a traditional IRA. And while you can’t contribute to a Roth IRA until age 59 1/2, you can still withdraw money from a Roth IRA after age 70 1/2.
It’s also possible to transfer assets from one employer plan to another. So, if you change jobs, you can transfer your 401(k) balance to a different employer plan.
And finally, you can borrow against your 401(k) to pay off debt. As long as you repay the loan within five years, you can continue contributing to the same plan.
Cons
Limited Control – Rollover contributions are usually limited to $100,000, meaning that if you roll over the money to a new employer, you’ll lose control of your retirement savings. While rolling over your 401(k) is a common practice, it’s important to understand the pros and cons of doing so.
Also, consider whether you’d rather invest your own money or let someone else handle your investments. If you choose to roll over your 401(k), you’ll likely be investing in mutual funds instead of individual stocks. Mutual fund managers typically charge management fees, which eat into your profits.
For example, Vanguard charges 0.17% annually, while Fidelity charges 1.5%, according to Morningstar.com. If you decide to roll over your 401(k), you might end up paying higher fees than if you invested directly yourself.
In addition, rolling over your 401(k) means that you’ll no longer receive matching contributions from your current employer.
Matching contributions are free money that helps boost your returns. For instance, if your employer matches 3% of your contribution, then you’ll receive 6% back in return.
Finally, you’ll lose control over your finances. As mentioned earlier, rolling over your 401K means that you’ll no longer be able to manage your retirement accounts. Instead, you’ll have to rely on financial professionals to manage your money.
Higher fees – Rollover accounts are becoming increasingly popular among Americans who are switching jobs. Many employers offer rollovers as part of their benefits package, allowing employees to transfer their retirement savings into a brand-new account with a different employer.
While this sounds like a great idea, there are drawbacks to rolling over your retirement plan. One of the biggest downsides is the increased fees associated with doing so. Fees can range anywhere from 0% to 10%, depending on the type of account you choose.
For example, if you decide to invest your money in a traditional IRA, you’ll pay no fees whatsoever. But if you opt for a Roth IRA instead, you could end up paying up to 10% in annual fees.
It’s important to understand that while fees might seem insignificant, they add up over time. So, if you’re considering a rollover, make sure you weigh the pros and cons of each option.
For example, let’s say you had $10,000 in a Traditional IRA account and wanted to roll it over into a Roth IRA. If you were under 59 1/2 years old, you could do this tax-free. If you were older than 59 1/2, you would owe taxes on the entire $10,000.
This is why it’s important to consult with a financial advisor who understands both types of IRAs. If you decide to roll over your funds, be sure to contact your employer to confirm that they allow you to do so. Also, consider contacting your state department of revenue to verify that you qualify for the rollover.
Key Takeaway
If you have money invested in a 401(k) plan from your previous employer, you should definitely roll over your funds into a new account when you switch jobs. This will ensure that your retirement savings continue to grow tax-free until you retire.
However, if you have a traditional IRA, you may want to consider rolling it over into a Roth IRA. Either way, it’s always smart to consult with a financial advisor before deciding which option is right for you.