Employers offer employer-sponsored 401(k) and 403(b) plans to help employees save for retirement. The benefits of these employer-sponsored plans are that the money grows tax-deferred. You will not pay taxes on the funds until you withdraw the funds for retirement.
So, what happens to your 401(k) or 403(b) plans if you change jobs. How do you continue to manage your old 401(k)s or 403(b)s and continue to achieve your financial and retirement goals from a previous employer? The good news is that you have four available options.
1. Leave your 401(k) or 403(b) with your old employer: This is one of the most common options people know that is available. If your previous employer permits it, you can keep your old 401(k) or 403(b) with your previous employer. The investments will stay the same, but you cannot make any new contribution to the plans and will most likely not receive advice on your assets.
2. You can cash out your 401(k) or 403(b): The bottom line to any retirement account is that it is your money, and you have access to it. The issue with the cash-out option is that you likely will be charged a 10% penalty for any withdrawals before 59-1/2 years of age, plus you will owe federal income taxes and any state and local taxes. This decision can cause a tax burden. Also, you have reduced the savings you have accumulated for retirement and lost the ability for your funds to continue to grow.
3. Rollover your 401(k), 403(b) into an IRA: Rolling over your old 401(k) or 403(b) into an IRA allows your retirement funds to continue to grow on a tax-deferred basis. With IRAs, you have more investment options than 401(k)s and 403(b)s and, most importantly, more control when investing in those options. IRA offers a variety of stocks, ETFs, bonds, mutual funds, etc. IRAs are not restricted to one rollover. The IRA is a great tool because you can roll over multiple old 401(k)s or 403(b)s. Your rollover can either be a direct rollover or an indirect rollover.
You request a direct rollover to the plan administrator for your previous 401(k) or 403(b). The plan administrator will send your money in the form of a check directly to and payable to the financial institution that holds your IRA. Since you have never taken possession of the funds, no tax is withheld. The direct rollover process is more common and has an easy completion process.
An indirect rollover requires more responsibilities on your part. When you request an indirect rollover, the check will be made out to you, and you have up to 60 days to deposit the funds into your IRA. Since you have control of the funds and technically a withdrawal, 20% of your account assets will be withheld. You may be able to recover most of the amount when you file your tax return. With the indirect rollover, you must always consider your tax situation and its effect on your investment assets.
4. Move your old 401(k) or 403(b) to your new employer-sponsored plan: If allowed, your new employer will let you roll over all or some of your previous retirement plan funds into the company's employer-sponsored plan. The move will enable you to keep all your retirement funds in one location.
The Bottom line
When deciding which option is right for you, you must consider your goals and other financial factors. Before deciding, it is best to discuss your options and plans with a financial advisor and tax professional.
The information contained herein is intended for educational purposes only and is not exhaustive. Diversification or any strategy that may be discussed does not guarantee against investment losses but is intended to help manage risk and return. If applicable, historical discussions or opinions are not predictive of future events. The content is presented in good faith and has been drawn from sources believed to be reliable. The content is not intended to be legal, tax, or financial advice. Please consult a legal, tax, or financial professional for information specific to your individual situation.
This content was not reviewed by FINRA