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Managing Your 401(k)

When it comes to old 401(k) accounts, it pays to know your options.

If you are like most people, you’re likely to change jobs several times during your working life. And you’ll likely have a 401(k) account through your (former) employer to deal with. Here are the four options for what you can do with your 401(k) once you are no longer with an employer:

1. Leave Your Money Where It Is
If the plan allows, you can leave the assets in your former employer’s 401(k) plan, where you can continue to benefit from any tax-advantaged growth. There is something to be said for having familiar investment choices and your former employer’s plan may provide access to investment choices and plan services that aren’t available in your new plan.

If you’ve just changed employers, find out if you must maintain a minimum balance in your old plan, because many plans require a minimum balance of $5,000 to remain in the plan. You’ll also want to review and understand the plan’s fees, investment options and other provisions, especially if you may need to access these funds at a later time.

2. Roll Your Money into a New Employer Plan
If you’re changing jobs, you can roll your old 401(k) account assets into your new employer’s plan (if permitted). Many people like the convenience of having just one account to keep track of and manage. In addition, your new employer’s plan may offer investment options and services not available in your former employer’s plan. This option also maintains the account’s tax-advantaged status. Find out if your new plan accepts rollovers and if there is a waiting period to move the money. If you have Roth assets in your old 401(k), ensure your new plan accommodates them. Also, review the investment options and fees differences between your old and new employers’ 401(k) plans.

3. Cash Out
Cashing out your old 401(k) may have significant financial consequences, including the potential for tax-deferred growth. Not only are those funds considered taxable income and subject to an immediate tax withholding, but you may also be subject to a 10% early withdrawal tax penalty if you cash out before age 59-1/2. Keep in mind that your former employer is required to withhold 20% before the distribution.

4. Roll Over Your Money to an IRA
For more retirement investment options and to maintain the tax-advantaged status of the account, roll your old 401(k) into an individual retirement account (IRA). You will have greater flexibility over access to your savings. It’s important to note that if you don’t directly transfer the funds via “direct rollover”, your employer must withhold 20% from the disbursement. Work with your former employer to set up your direct rollover. Pre-tax assets can roll over to a traditional IRA whereas Roth assets can roll directly to a Roth IRA. Ensure you review the investment options and fees differences between an IRA and your old and new employers’ 401(k) plans.

If you have already cashed out your 401(k), you may transfer the funds into another IRA or plan within 60 days. You must replace the 20% your employer previously withheld to avoid taxation and early withdrawal penalties.

The Bottom Line
If possible, choose an option that allows you to continue to benefit from your savings’ tax-advantaged status, preserving and increasing the growth potential of your wealth. The financial advisors at Kinecta Wealth Management are always available to assist you in determining which option is best for you. And it always makes sense to consult with your tax professional.

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