Manage your retirement savings when you change jobs
Participating in your company's 401(k) plan is a good way to save for retirement. But what happens if you lose your job or move to a new company? Here's how to decide what to do with your 401(k) so it keeps working for you.
Your have four choices when you leave a job:
- Keep the account right where it is. You can typically stay in your 401(k) if you have at least $5,000 invested in your account. This may make sense if you are satisfied with your old 401(k) plan's investment choices.
- Transfer your account to the 401(k) offered by your new employer. Not every company allows transfers into its plan. If yours does, and the new plan includes good investment choices, this could be a good move.
- Cash out the money. This will cost you. If you are under 55 years old and you take the money in a cash distribution, you will owe a 10% early withdrawal penalty, as well as the normal income tax due on 401(k) withdrawals. Plus, you'll probably miss that income in retirement.
- Roll over your 401(k) into an IRA. This will help you maintain your retirement funds' tax-deferred status while expanding your investment options. Roll the 401(k) into an IRA and you have access to a wide selection of investment options and flexibility. That allows you to hunt for the lowest-cost investment options. Learn more about rolling a 401(k) into an IRA.
Tax Tip #1
Contributing to a 401(k) or IRA is just one way to help reduce your taxes. To make sure you get all the tax deductions you are entitled to, you may want to consider hiring a tax preparer.
How to roll over your 401(k) into an IRA:
- Make a direct rollover. It can be costly and complicated to receive a check when you roll your 401(k) into an IRA. Your old employer will be required to withhold 20% of the amount for taxes and if you don't get the money reinvested in an IRA within 60 days the entire amount will be considered a withdrawal that is subject to income tax and a 10% early withdrawal penalty if you are younger than 55. The smarter choice is to have your IRA provider help you do a direct rollover: You fill out a form to authorize your IRA provider to contact your old employer to have the proceeds from your old 401(k) directly transferred into your new IRA.
- Consider rolling your 401(k) into a Roth IRA. The advantage of doing so is that in retirement your Roth IRA withdrawals will be federally tax-free. But if you convert your traditional 401(k) into a Roth IRA you will have to pay tax now on the portion of the rollover that was pre-tax assets. Learn more about rolling a 401(k) into a Roth IRA.
- Build a diversified portfolio of investments. When you roll a 401(k) into an IRA you have the freedom to choose from wide selection of investment options. Your goal should be to own a diversified mix of different asset types.
Brokerage IRAs (non-FDIC insured) are available through Merrill Edge. Bank IRAs (FDIC insured) are available through Bank of America, N.A.
Merrill Edge is the marketing name for two businesses: Merrill Edge Advisory Center, which offers team-based advice and guidance brokerage services; and a self-directed online investing platform. Both are made available through Merrill Lynch, Pierce, Fenner & Smith Incorporated (MLPF&S).
Banking products are provided by Bank of America, N.A., Member FDIC.
Investment products are provided by Merrill Lynch, Pierce, Fenner & Smith Incorporated and:
Merrill Lynch, Pierce, Fenner & Smith Incorporated is a registered broker-dealer, member FINRA and SIPC, and a wholly-owned subsidiary of Bank of America Corporation.
Investing involves risks, including the loss of principal invested.
Diversification does not assure a profit or protect against a loss in declining markets.