According to the Investment Company Institute’s Quarterly Retirement Market Data report, Americans held $11.0 trillion in all employer-based defined contribution retirement plans on December 31, 2021, of which $7.7 trillion was specifically held in 401(k) plans. For most of us, our employer-sponsored retirement savings will be our greatest wealth building option and as the Great Resignation continues, there is more risk of losing track of this great wealth building tool. If you are leaving or have left your job, here are some options to consider for what to do with your 401(k):
- Leave your future with your old employer. If you choose this option, your investments will not be monitored, and you may incur fees for continuing to keep the account open. The asset may continue to be invested, but your options for investing will be restricted.
- If possible, roll your 401(k) into your new employer’s plan. This is a tax-free option that will allow you to maintain a single employer plan where you can continue to save and build toward retirement. However, if you do not plan to go back to work, you plan to work for yourself or your new employer does not offer a 401(k), consider the next option.
- You can roll your old 401(k) into an individual retirement account (IRA). Also a tax-free option, this method requires that you open and monitor an account through the financial institution of your choosing. You will have the benefit of having access to the full spectrum of investment possibilities. If you do not have the time, ability, or willingness to monitor the growth of your future retirement income, you can reach out to a financial professional for help.
- Take a full distribution. This is the most tax-aggressive option and likely not advisable, as you pay taxes at your current income tax rate. ALso, if you are under age 59 ½, you will be assessed an additional 10% penalty if the distribution is not for a qualified reason.
Each individual should weigh the pros and cons of their situation before deciding which option is best. When you leave your job, your savings are unattended, and if you change your address without notice to your former employer you run the risk that your savings will be considered abandoned and sent to the state’s unclaimed property funds.
Regardless of your decision, it is best to take ownership of your assets and your future sooner rather than later. If you are uncertain of how to do so, there is no shame in seeking professional help. Retirement is one of the most important life events that we will experience. The planning can sometimes feel daunting and should be approached with the serious consideration that your future deserves.
Hilary Daniel, MBA, CFP®
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Note: This article appeared in our Q2 2022 newsletter, go here to read it in its entirety: parsecfinancial.com/newsletters/thrive-by-learning-and-growing-edition.