What Happens to My 401(k) Plan If I Switch Jobs?

Estimated reading time: 3 minutes

When you feel it’s time to change jobs so you can live up to your fullest potential, there are some lingering questions that may keep you hesitating. One of these is typically about what happens to your retirement savings when you switch companies. It’s your money and you need to be aware of how you can get access to it when you make the switch. 

There are typically four ways in which you can deal with a 401(k) retirement plan when you switch employers. Each one of these comes along with their own benefits and their own downfalls. We encourage you to weigh all of the options before making a final decision, so you don’t regret your decision later down the road. Let’s take a look at what these options are. 

1.) Liquidate For Cash

The first option you will always have is to liquidate your 401(k) to receive a payment in cash. This comes with the benefit of receiving your savings in cash. The downfall of this approach is you are subject to State and Federal Withholding Taxes and possibility an early withdrawal penalty. The Federal Withholding Tax is 20 percent of the amount in the account and the State requirements differ. If you are under the age of 59.5, you are subject to a 10 percent early withdrawal penalty when you cash out.

2.) Rollover To Your New Employer

Most companies will allow you to rollover your 401(k) from your previous employer. You should check with your new employer to ensure this is an option for you. With this option, you don’t have to worry about paying taxes just yet or any sort of withdrawal penalty. 

3.) Rollover Into A Traditional IRA 

If your new employer doesn’t allow you to rollover your 401(k) from your old employer, you have another option. You can rollover your existing 401(k) into a traditional IRA account. This is also a feasible option for those who simply don’t like their new employer’s 401(k) funding options. By rolling your money over into an IRA, you have the added option of choosing from a larger scale of investing options. Realize that once you rollover your old 401(k) into an IRA account, you probably won’t be able to roll it back over into a 401(k) account in the future. This is simply due to the fact that many 401(k) plans don’t accept IRA rollovers. 

4.) Leave Your 401(k) With Your Old Employer 

Depending on the options you have with your old employer, they may allow you to keep your 401(k) with them. This is typically under the assumption that the account is left as-is, meaning no more contributions can be made. This is always an option you can look into if you are not quite sure what you want to do with your 401(k) yet. 

Understanding more about 401(k) accounts and how they operate is the key to making them work for you. Anytime you switch employers you should always consider what you want to do with your existing 401(k). Be sure to assess your options above and make the best choice depending on your situation.

This Is Why Your Employer Should Offer a 401(k)

Estimated reading time: 3 minutes

Offering a 401(k) has now become standard practice for many businesses, regardless of what size they are. As employees start to realize the many advantages that 401(k) plans have over other types of retirement savings accounts, they are factoring the availability of one through employer benefits when deciding on which job they would like to take. Business owners are realizing this shift in need from employees and have indulged in creating 401(k) plans as they provide many benefits for the business as well. Let’s see what some of these benefits are below. 

Business Tax Savings 

Businesses can experience tax savings from offering 401(k) plans in three different ways. These include the EGTRRA Tax Credit, contributions tax deduction, and reduction of payroll taxes due annually. Let’s take a look at how each one of these tax savings work.

First, we have the EGTRAA tax deduction, which stands for Economic Growth and Tax Relief and Reconciliation Act. This allows small businesses an annual total tax credit of up to $500 for the first three years of instituting a retirement savings plan. The tax credit is equal to 50 percent of the cost of creating and administering a 401(k) savings plan. Only small businesses with less than 100 employees qualify for this tax credit. 

When a business decides to contribute to their employees 401(k) plans, they immediately qualify for a tax deduction. All the contributions that are made throughout the year can be deducted up to applicable limits. Lastly, when employees make contributions to their 401(k) plan, it’s from their before-tax income. This means the salary listed on the payroll sheet for the business will display the amount the employee made after their 401(k) contributions. This could potentially translate to a reduction in payroll taxes due annually.

Employee Recruitment And Retention 

In most situations, employees have many options when it comes to finding a job they want. This has led more employers to come up with great benefits to successfully recruit experienced staff. Having an established 401(k) retirement savings plan is a must for any business that wants to recruit and retain productive and knowledgeable employees. 

More Affordable Than Ever Before 

As employee pension plans are finally phasing out, the 401(k) is becoming the most popular form of retirement investing. This means that more affordable options are coming out to business owners who are looking to institute this type of employee benefit. No longer do business owners need to struggle with paying tons of money to financial advisors. Now, they can simply design and maintain 401(k) plans for their employees through simple web-based applications. 

As you can see, there are many reasons why business owners should seriously be thinking about offering their employees a 401(k) plan. These are not just great for the employees, but they are fantastic for the employers as well. We highly encourage any business owners out there who are not currently offering this type of retirement program to seriously look into doing so

Is Your 401(k) Being Mismanaged?

Estimated reading time: 3 minutes

Maximizing the money you invest in your 401(k) is important to your future. The choices that are made concerning your 401(k) have a drastic impact on your retirement. It’s important that you take the time to understand your own plan so you can assess whether or not your employer’s 401(k) plan manager is doing a good job preparing your future. 

Who Manages Your 401(k) Plan? 

If you work at a medium or small-sized business, it’s likely that the business owner or senior manager takes care of the 401(k) administrating. These individuals don’t typically have any financial background experience in investing. Most of these businesses want to offer the benefits of 401(k) plans to their employees, but they lack the funding of hiring an experienced financial advisor.

While setting up a 401(k) plan is fairly simple for any amateur to do, running the plan is another story. Many of the persons in charge of running these small business 401(k) plans don’t understand how to compare vendors, pick the most suitable investment menu, and other essential tasks to maximizing the earnings for the plan owner. In addition, realize that since the business owners and senior managers have many other duties as part of their job, it’s safe to say that the company’s 401(k) plans can be neglected from time to time when more important matters come up. 

Negative Impacts On Your 401(k) Plan 

Having a person with financial experience managing your retirement account is a necessity. If your account is being managed by someone with a limited financial planning background, they may be making poor choices. This could lead to investing in bad options, being charged too much from a vendor, and others. It’s important to realize that even a one percent decrease in your funding performance could equate to a large decrease in your retirement funds. 

What Should You Do? 

The first thing you should do is to become more educated about 401(k) plans. You should read over the documents you were given by your employer about your retirement account. This will help you to become more familiar with your account options, investments, and fees. 

If you find that you’re not totally happy with the design of the 401(k) plan, you have a few options. You can talk to other colleagues to see if they would be interested in approaching the company in a group setting. You can always speak to your employer about potentially changing the design of the 401(k) plans that they offer. Lastly, you can always opt to roll your 401(k) with the employer over to your own IRA account. 

Your 401(k) is a vital aspect of your future after retirement. If your account is mismanaged during your working life, it can drastically impact your ability to retire when you come of legal age. You should try to learn as much as possible about your own 401(k) account and be an active participant in setting yourself up to maximize the growth potential of your account .

How to Choose a 401K Plan: Three Factors to Consider

Estimated reading time: 3 minutes

If you’re lucky enough to work for an employer who offers a 401k plan, you’re already ahead of the retirement options curve than most people. A nice perk to most 401k plans is that your employer will typically match up to a certain percentage that you contribute. For instance, if your employer offers a 6% match option, any contribution you personally make up to 6% will essentially be doubled. If you contribute 4%, your employer will contribute 4% as well. If you contribute 8%, your employer will still only contribute that 6% maximum. It is usually recommended that you contribute at least what your company is willing to match because you will be doubling your investment every year at minimum. If you don’t, you’re effectively refusing free money. Having a 401k plan can be a great way to save for retirement. However, if your company offers more than one option, or twenty options, things can get confusing. A mistake people often fall into is just picking one randomly and hoping it works out. Explained below are a few factors to consider before you decide which investment option is best for you.

  1. Your age can determine a lot about how you should invest. Your portfolio should consist of at least a few different investments to increase your chances for growth and also to spread out your risk. Your age will determine the allocation of the funds to riskier investments versus safer investments. If you’re getting started early in life, time can be on your side with the riskier, but highly rewarded, options. If the market dips for a few months, you’ll have time to wait for an upswing and rebuild your wealth. The closer you get to retirement age, the fewer risks you’ll want to take with your soon-to-be needed funds. The portfolio balance should swing from mostly risky in your early life to mostly safe later in life. Your financial advisor can help you determine the balance that is right for you personally. The safer options won’t include as much reward, but you’ve hopefully built a strong account up to that point.

Your age may also determine how much you contribute to your account each year. The earlier you invest, the more time it has to grow. A person who consistently invests a little starting in their 20’s can still earn more by retirement than one who contributes a lot only at the end of their career. If you’ve put off saving for retirement, you may need to contribute more to catch up to your retirement goals.

  1. What you invest in could be restricted to only a few options by your company. Sometimes companies will choose plans that offer investments in their industry, while others prefer U.S. based companies regardless of niche. Plans also may necessitate a minimum initial investment. Some can be $1,000 while others will require $25,000 or more. If you’re just starting out, you may need to build up to the higher investment plans.
  2. Benefits and fees may also help you narrow down a plan. Some plans may offer in-person advice or personal control over the investment, but come with higher fees, while others have automatic or target-date options with fewer associated costs. You may also possess certain knowledge over specific niches that you’re more comfortable investing with, such as technology. In the end, it’s your money and you should feel at least somewhat comfortable with the investment options presented to you.