How To Manage Your 401(k) or 403(b) After You Leave Your Job.

Employers offer employer-sponsored 401(k) and 403(b) plans to help employees save for retirement. The benefit of these employer-sponsored plans is 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 last employer. The investments will remain the same, but you cannot make any new contributions to the plans, and you will most likely not receive asset advice. You will also no longer be able to take loans from the retirement plan.

2. 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, CDs, bonds, and mutual funds. 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 into an IRA. Your rollover can be either direct or indirect.

• You request a direct rollover to the plan administrator for your previous 401(k) or 403(b). The plan administrator will send your money as a check directly to the financial institution that holds your IRA. No tax is withheld since you have never taken possession of the funds. The direct rollover process is more common and easier to complete.

• 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.

• IRAs managed by a financial advisor may charge slightly higher fees than those charged within your 401 (k) or 403 (b) plans. As the investor, you must decide whether you would like to manage your IRA or have a professional advisor manage it.

  
  

3. 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. You must discuss your options with the new employer's retirement plan administrator.

4. 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 will likely be charged a 10% penalty on any withdrawals before age 59-1/2, 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 grow. Cashing out your 401(k) or 403(b) is usually not recommended by professional financial advisors and is considered a last resort for serious financial emergencies.

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.

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Collins Wealth Management LLC is a Fee-only, fiduciary Registered Investment Advisory firm. The information herein is intended for educational purposes only and is not exhaustive. Diversification, or any strategy 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 situation.