Many people participate in an employer-sponsored retirement plan called, “the 401(k) plan.” If you are lucky enough to get such an account, you would know that every month you will have to contribute to the account, and your employer will have to match it, usually 3%-6%. This will go on until you are no longer employed in the company.
Have you ever thought about what would happen to your retirement fund if you leave the company or, God forbid, you are laid off from your current job?
“The case of the undecided 401(k) Plan”
If you have lost your job for any reason, you have the following options available:
1.Cash Out
All of the contributions that you have made to your retirement accounts are yours. In the same manner, depending on your vesting schedule, your employer’s contributed “match” money will be yours too if you have worked for the company for a certain period of time. The first option you have is to take out the money that you have saved and use it for anything that you want. WARNING! We do not encourage you to choose this option. After taxes and other penalties (A 10% IRS penalty just for the honor of taking your money earlier than age 59 1/2)– imposed because of early withdrawals – you could potentially lose a lot of money. Also, once you have that cash in hand, you will be tempted to spend them on “the next shinny object” that you probably don’t need. As a result, when your actual retirement comes, you will be left with no savings.
2.Leave the Money In the Plan
If you are leaving your current work place, you can consider leaving the money already saved in your retirement plan “as is” and then withdraw it near the time of your retirement.
3.Roll Over Into the New Plan
If you are leaving the company for another job, you can consider rolling over the existing plan into a new plan that is managed by your new employer.
4.Roll Over to an IRA
While you can choose any of the methods listed above, we would advise you to consider rolling over your 401(k) plan to something called a “Rollover IRA.” If you don’t have an IRA, you can use the money from the 401(k) plan to open one.
In the next section, let’s learn more about a Rollover IRA (or Traditional IRA) and why it is beneficial to roll it over.
Benefits of Rolling Over Your 401(k) Plan Into a Rollover IRA
Why the peer pressure to get you to consider rolling over your 401(k) plan into an IRA plan? In order to make the decision making process easier for you, we have listed some of the benefits that you can get when you roll over your 401(k) into an IRA. It’s then up to you to decide which way you would want to go with your existing retirement plan.
- More Investment Choices
When it comes to 401(k) plans, you don’t have many investment choices, you are usually only left with a few options to choose from. With an IRA, you have multiple types of investments to choose from, which may include bonds, exchange-traded funds (ETFs), and individual stocks and more. - Lower Fees and Costs
Maintaining an old retirement account leads to other unavoidable expenses. You may have to pay administrative and management fees. With IRA, you will have to pay for these costs too, but they are relatively lower than what you pay for your 401(k) retirement account. What appears on your statement may not be the whole story. Sometimes, the advisor or money manager may bill the overall fund, meaning it may not be reflected on your statement. Sometimes, this may be as high as 2%. - Better Communication
Managing an employer-sponsored 401(k) plan is easy when you are actually still working at the organization. It’s easy, it’s clean, it’s payroll deduct. Most of the time, all communications related to the plan are done through your company and your HR will let you know about all the recent updates. However, if you leave the job, managing it on your own could be a bit difficult as communicating with your former employer may be uncomfortable, awkward, and you may not be the same level of a priority as you once were. - Fewer Rules
A good thing about maintaining an IRA is that you don’t have to deal with complicated rules. IRA regulations are set by the Internal Revenue Service (IRS). Almost every broker follows these standard rules. There may be less restrictions and rules when taking your RMDS (Required Minimum Distributions) when you hit 72 years of age. This is when the government requires you to take money out whether you want to or not.
How to Roll Over Your 401(k) Plan
When it comes to finances, you must seek the guidance of a professional. While you can do these things on your own, it is always better to let an expert weigh the pros and cons of your decision. If you are planning to roll over an existing 401(k) plan to an IRA, you must get it done through a brokerage firm or advisor. Here are a few things that you must consider when choosing the right brokerage firm or advisor for yourself.
Cost
Many brokerages charge an exceptionally high amount of fee per trade, which may cost you a considerable amount of money. When searching for a good brokerage, have a quick look at the fee they charge per trade.
Mutual Funds
Another important thing that you must look at is the number of mutual funds that the brokerage offers. In case you are looking to invest in a particular fund, look for the brokerage which offers that fund.
Online Services
Today’s era is all about the race against time. When you are looking for a brokerage house or advisory firm, you must have a look at their website, review their investment opportunities and figure out how easy it is to use their online trading system. If using an Advisor, do they share your vision?
The Final Word
A recent survey has shown that Americans don’t have enough savings. Many people have the habit of spending whatever they earn – some even purchasing things on credit when they cannot afford it. When you leave your company, it is very tempting to take the cash out of your retirement plan and spend away. This will not only leave you with zero savings, but will also slap you with an IRS penalty. It is taxed as ordinary income and you are do not get that wonderful compounding interest we all love in our accounts that make it grow.
Resist the “urge to splurge” and consider either continuing to work with your current plan or rolling it over to an IRA. As discussed in the article, there are plenty of benefits of rolling over your plan into an IRA. You can thank us later.