The responsibility to save for retirement has been switched to us. Depending on your age, your parents or grandparents might have worked one job their whole lives and retired with a pension. Aside from a few jobs like the military, or a job with the city or state, most jobs no longer offer a pension, transferring the responsibility to save for retirement to us. Read to find out the 6 things you need to know about your employer sponsored retirement plan.
If your employer offers a retirement plan like a 401K, find out if they offer matching contributions. This is typically a dollar for dollar match or a fraction of your pay, up to a percentage. For example, if you’re employer matches up to 5% of your pay, by contributing 5% you’re getting a total of 10% of your base pay contributed to the plan. That’s 100% return on your money! This does not consider the potential rate of return over time that you might receive after investing those dollars.
The employer match is not yours to keep until you meet a certain time at your job. Be sure to ask what the time frame is, called a vesting schedule. If you ever see that your 401K balance and the vested balance are not the same, that means you’re still not entitled to keep the employer match if you were to leave the job. Understanding the vesting schedule will help you plan a potential job switch to make sure that you maximize the amount of the employer match that you get to keep.
What to Do with Your Old 401K When You Leave an Employer
Decisions, decisions! You have four options regarding your old 401k plan.
Keeping It Where It Is: The plan administrator might give you an option to keep it where it is. Be sure to ask what the fees are and consider the fact that as you keep switching jobs you might end up accumulating several old 401Ks, and it’s harder to be organized and plan.
Rollover to an IRA: You can open a Rollover IRA (Individual Retirement Account) at an institution of your choice and have the funds directly transferred to the IRA. If done properly, this is not considered a tax event. You will typically have more investment choices in your own IRA than you would inside a 401K plan. Be sure to ask about fees when considering this option. Another option is to do a Roth conversion. Same concept as the rollover IRA but instead you put the money into a Roth IRA. This will create taxable income so be sure to consult with your tax advisor to see if it makes sense for you. One of the benefits of a conversion is that you can then get tax free growth of those funds if you follow certain IRS rules.
Rollover to Your New 401K: Ask your new employer’s plan if they accept rollovers. If so, another option is to rollover your old 401k to your new 401k plan. This helps you consolidate so that you don’t end up with too many plans all over the place, so it’s easier to keep track of your money.
Take the Money Out: If you take the money out, you’ll pay income taxes and an additional 10% penalty if you’re under age 55 (IRS rule allows an employee to take money out without the 10% penalty if you withdraw the money between ages 55 and 59.5 and you were laid off, fired, or quit). This rule does not apply to IRAs (they have their own rules, including some exemptions to the 10% penalty), so be sure to consult with your financial planner or tax advisor to make sure you do what’s best for you.
Want to Know More About Saving for Retirement When You’re Young?
Be sure to listen to episode 003 of my podcast, where I interview Walter Brown, a financial advisor with WestPac Wealth Management in Las Vegas. We go a little deeper into the topics discussed above. In addition, we talk about Roth IRA vs. Traditional IRA, avoiding company bias in your 401K, target date funds, and much more.
Have a Question?
Send me an email at Luis@onmywaytowealth.com and let’s get started on pursuing your financial goals together. To get bi-monthly financial tips for Gen Xers sign up for my newsletter and subscribe to the podcast.
Investment Advisor Representative of Retirement Wealth Advisors Inc. (RWA), 89 Ionia NW, Suite 600, Grand Rapids, MI 49503 (800) 903-2562. Investment Advisory Services are offered through RWA. Build a Better Financial Future and RWA are not affiliated.
This information is designed to provide general information on the subjects covered, it is not, however, intended to provide specific legal or tax advice. You are encouraged to consult your tax advisor or attorney.