Tips to Keep Your 401(k) Working When You Change Jobs
At some point, almost everyone changes jobs and with close to 11 million open jobs in the summer of 2022, chances are it could be you. But when changing jobs, we are also leaving behind retirement plans such as 401(k)s. Conventional wisdom holds that you roll that old employer-sponsored plan into a new individual retirement account. But what kind of new IRA?
First, you can roll your former employer's 401(k) into the plan from your new employer (within 30 days), which gets you continuing tax-deferred growth of your assets and deferred required minimum distributions, among other ongoing benefits. Not all employers accept rollovers from previous employers' plans, and investment options of your new 401(k) may be more limited in number compared with an IRA.
If you do decide to roll into a new IRA, check:
- Expenses. Generally, many employer-sponsored plans can offer investments (generally mutual funds) much cheaper than you as an individual can get in an IRA. Employers usually have a large number of workers and plan providers put many clients in the same funds, leading to economies of scale.
- Expense ratios. A measure of what it costs an investment company to operate your fund, therefore tend to be lower than in IRAs. Additionally, if you do roll over to an IRA, consider a fund company that doesn't charge commissions.
- Funds flexibility. Some employer-sponsored plans offer funds with more congenial terms than you get with an IRA.
For example, an index fund in a 401(k) may allow you to contribute only $50 per period, where the same index fund outside of the plan might require a minimum $10,000 contribution. Some employer plans may offer mutual funds of companies not available to the general public, as well.
- Taxes. Rolling over from a 401(k) to a traditional IRA is usually a non-issue when considering taxes. Rolling over from a pre-tax contribution plan such a 401(k) to a Roth IRA, on the other hand, almost certainly brings tax implications.
Your pre-tax money usually becomes taxable when the rollover occurs. Your wisest move: Roll over the entire amount and pay the taxes from outside of the rollover amount.
If you want taxes withheld from the rollover amount, the Internal Revenue Service counts this withholding as a taxable distribution and, if you're younger than 59½, tacks on a 10% early withdrawal penalty.
- Control. Generally, moving to an IRA gives you more control of your money than you had with a 401(k). You may also enjoy access to a broader selection of funds than in your old 401(k) and may also contribute more money to the IRA even after you left your employer.
- Net unrealized appreciation (NUA). When you own your employer's stock in your 401(k), you can elect NUA tax treatment, meaning that you can treat the basis of the stock purchased as taxed as ordinary income and your holdings' subsequent appreciation incurs long-term capital gains tax rates. You lose NUA treatment if you roll over into an IRA.
Before you decide what to do when rolling over your 401(k), your Synovus financial advisor is here to help. Call us at 1-888-SYNOVUS (1-888-796-6887) to talk through your specific situation.
Tips to Keep Your 401(k) Working For Your Retirement
Lots of investors never bother to check on their 401(k) regularly. But you should keep a constant eye on your funds' risk level, whether your asset allocation is out of whack and if your beneficiaries still are the ones you want.
When you start a new job and join a 401(k) or another employer-sponsored retirement savings plan, you fill out a few forms, decide how much you want to contribute, and you pick some investment options.
Then each paycheck, like clockwork, money goes into your retirement account automatically. It's easy to just set it and forget it, but this mindset can cost you in a big way. Although you don't have to follow every tick in the market, you do need to look after your retirement money.
- Re-evaluate Your Investment Choices. If you select investments when you enroll in your 401(k), but haven't looked at them in a while, that allocation may no longer be appropriate. Over time, you may take on more risk than you want, especially when you don’t rebalance your account.
- Review Your Options Regularly. There may be additional investment choices with lower fees, or an allocation that is a better fit for your goals.
- Set Up Automatic Rebalancing. You shouldn't put your 401(k) on autopilot, but the automatic rebalancing feature is helpful in maintaining your intended allocation and keeping risk in check.
Over time, your account may drift away from your original allocation. For example, let's say that you chose an allocation of 50% stocks and 50% bonds in your 401(k). In a heated stock market, the percentage of stocks grows to 70% or more, exposing you to additional risk. If you switch on the rebalancing feature, the account automatically sells stocks and buys bonds to return to the 50/50 mix. Think of it as a sell-high-buy-low feature.
- Re-examine Your Target-date Funds. If you don't want to choose specific investments for your plan, then you can put your money in these funds, which focus on a date when you might want to retire. Target-date funds adjust their investment allocation to match your risk tolerance, considering your current age and a theoretical retirement age of 65. Your mix gets more conservative as your retirement age approaches.
The tricky part is this allocation varies greatly among these funds. Two funds with the same target date may have completely different investments and levels of risk. For instance, one fund may have a 50% stock allocation and another 70% for someone who wants to retire in 20 years. Target date funds don't take your individual situation into account. The risk may not be appropriate for you.
If you invest in such a fund, look at the overall investment allocation to make sure that the risk in the fund matches your tolerance.
- Review Your Beneficiaries. The most common mistake is forgetting to update your beneficiary form. This one-page document, not your will, decides who gets your retirement account. If you get married, have kids or get divorced, chances are it's out of date. Should something happen to you, your family members may be shocked to find out that your ex-wife gets the 401(k) money. Most plans give you online access to the form, so make sure you capture any changes.
Automatic features of your 401(k) save your time and simplify saving for retirement, but periodically reviewing your plan prevents avoidable mistakes from derailing your retirement goals.
Your Financial Advisor
Remember this: when you plan for retirement – no matter how far away it might be – you need to model your financial expenses, anticipate unexpected expenses, think about your lifestyle choices, account for future inflation, and make various market assumptions. And these must be modeled within the confines of your risk profile and goals.
But more importantly, you can't just "set it and forget it."
When modeling your retirement scenarios, you will undoubtedly struggle between your current and your future-retired-self. For your own well-being, favoring the future you is the best choice. Trouble is, this is very hard to do.
Important Disclosure Information
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
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