Did you recently change jobs? Or did you recently retire? If so, you may have a 401(k) plan still in force at your former employer. And if you’re like many Americans, your 401(k) may be one of your largest retirement assets.
You have several options available for managing your old 401(k). While taking care of a plan at a former employer isn’t an especially complicated process, it is an important one. The decisions you make with regard to the plan can impact your taxes, investment results, and even your income in retirement.
Below are a few of the most popular options for a 401(k) at a former employer. Review all your options and consider your specific needs and goals before making a decision.
Cash it out.
One option is to simply cash out the plan. This option is often appealing because it can generate a large lump sum amount that you can use however you wish. Once you separate from service, you simply fill out a distribution form and the plan administrator sends you a check for the balance.
There are some downsides to this strategy though. One is that the distribution will likely be taxable. If the distribution is sizable, it could push you into a higher tax bracket. Also, if you’re younger than age 59 ½, you may have to pay an early distribution penalty.
Also consider that by cashing out your plan, you lose out on future tax-deferred growth inside the 401(k). Your retirement may last for decades, so you will likely need growth to make sure your money lasts as long as you need it. Tax-deferred growth can help your funds compound faster and last through your lifetime.
Leave it there.
There’s nothing saying you have to do anything with your 401(k). You can simply leave the funds in the plan if you want. This option might be attractive if you’re happy with the plan’s investment options and comfortable with how the plan works. Additionally, by leaving funds in the plan you avoid distribution taxes and penalties.
However, there are also reasons why you might not want to leave the funds in the plan. One is that you may be limited to the plan’s lineup of investment options. Your tolerance for risk is likely to change as you get older. You may find that the plan’s choices don’t meet your evolving needs.
Retaining the 401(k) plan could be problematic if you have multiple investment accounts. The 401(k) is one more account that you have to manage. It can be difficult to implement a cohesive strategy across multiple accounts. You’re also creating an additional account that your beneficiaries will have to track down after you pass away. By consolidating accounts, you can simplify the management process for yourself and your loved ones.
Roll it over.
Finally, an effective option is to roll the 401(k) balance into an IRA. While the 401(k) is attached to your employer, the IRA is not. It’s an individual plan that stays with you. Many IRAs have a wide range of investment options, so it’s possible to develop a strategy that meets your unique needs.
When you roll your 401(k) funds into an IRA, you avoid distribution taxes and penalties. You also get to continue tax-deferred growth, as IRAs are generally taxed in the same manner as 401(k) plans.
Ready to develop a plan with your old 401(k)? Let’s talk about it. Contact us today at Baacke Insurance Services. We can help you analyze your needs and choose the best option. Let’s connect today.
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16295 - 2016/12/19