According to the U.S. Bureau of Labor Statistics, the median number of years that wage and salary workers aged 25 and older had been with their current employer in January 2022 was 4.9 years, the same as in 2021 and just 0.01 percent less than in 2018. That translates to approximately nine jobs over 45 years and a potentially equal number of 401(k) plans. When you change employers, it is essential to consider what you do with your hard-earned retirement savings to ensure you continue making those dollars work for you without triggering any tax liabilities or penalties.
Generally, you have four options when you leave a job in which you participated in its retirement plan. You may either:
The best option for you will depend on your unique needs and circumstances.
For example, consolidating your retirement savings and rolling over multiple 401(k)s from previous jobs into a current employer’s plan will make it easier for you to track all your investments and market returns in one place from just one plan administrator. This can save you significant time and energy during your working years when you may need to rebalance your asset allocations to align with your risk tolerance and meet your retirement savings goals. It is also beneficial when you retire at age 72 (or 73 if you reached age 72 after Dec. 31, 2022) and will have to begin taking required minimum distributions (RMDs) from each of your 401(k), IRA, Simple IRA and SEP IRA accounts.
Another option is to roll over your existing 401(k) savings into an IRA, which generally can give you access to a broader range of investment options than the funds offered by an employer’s plan. This provides you with greater flexibility and control over your retirement savings strategy while also allowing you to save money that can continue to grow tax-deferred until you take withdrawals in retirement.
If you instead decide to keep your savings in a previous employer’s defined benefits plan, keep in mind that as a non-employee, you will be subject to special rules and limitations. For example, while you may not continue contributing to that plan, you may incur maintenance fees that you could otherwise avoid with a rollover. In addition, be aware of the rules many employers have regarding the treatment of abandoned accounts and those with low balances. In some instances, the administrator can distribute those funds to current plan participants.
Finally, you have the option to cash out your 401(k) plan. However, such action will have immediate income tax consequences and may subject you to a 10 percent early withdrawal penalty if you are younger than age 59½.
The decision of what to do with your existing 401(k) plan when you change jobs or leave the job market comes with an array of risks and benefits that you must take the time to consider. Working with experienced financial advisors can help you determine which option is best for you and your unique circumstances.
About the Author: Olga Ismail is the head of Retirement Plan Consulting and a financial advisor with Provenance Wealth Advisors (PWA), an Independent Registered Investment Advisor affiliated with Berkowitz Pollack Brant Advisors + CPAs and a registered representative with PWA Securities, LLC. She can be reached at the firm’s Fort Lauderdale, Fla., office at (954) 712-8888 or info@provwealth.com.
Provenance Wealth Advisors (PWA), 200 E. Las Olas Blvd., 19th Floor, Ft. Lauderdale, FL 33301Â (954) 712-8888.
Olga Ismail is a registered representative of and offers securities through PWA Securities, LLC, Member FINRA/SIPC.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Any opinions are those of the advisors of PWA and not necessarily those of PWA Securities, LLC. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of PWAS, we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Prior to making any investment decision, please consult with your financial advisor about your individual situation.
401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10 percent federal tax penalty. Investing involves risk, investors may incur a profit or loss regardless of the strategy or strategies employed. Future investment performance cannot be guaranteed. Matching contributions from an employer may be subject to a vesting schedule. Please review your retirement plan documents or consult with a financial professional for more information.
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Posted on June 26, 2024