Have you considered what you’ll do with your 401(k) plan if you’ve recently changed jobs or are planning to in the near future? Should you keep the plan with your former employer, roll it over to your new employer, transfer it to a rollover IRA, or distribute the account, which presents significant tax burdens? Many people are unsure of how to manage their retirement plans when their jobs change because the options and tradeoffs are confusing.
If your new employer’s plan allows a rollover from your previous employer’s plan, there are benefits to moving in that direction. Before jumping into a rollover, however, It’s important to analyze your new employer’s plan to understand the investment options, fees, services, and distribution choices that may differ from your former employer’s plan.
if you are comfortable with those terms, here are some benefits of rolling over your old 401(k) plan to your new employer plan:
By combining your former 401(k) plan with your new plan, you’ll have peace of mind knowing that your retirement savings are secure and easy to manage in a single place. Considering the substantial role that retirement funds play in your overall life savings, consolidation should be an important factor to take into account.
Rolling over your old 401(k) to your new plan not only simplifies the management process but also streamlines it. If you need to make any changes to your retirement timeline or goals, you’ll only need to update a single account instead of dealing with two or more. Additionally, you’ll save yourself from duplicative administrative work, such as updating your address on the old account due to a move or other personal life changes.
Transferring the funds from your old 401(k) plan to the new employer’s plan has the benefit of boosting your borrowing capacity. The majority of 401(k) and 403(b) plans provide the option for participants to borrow from their accounts. Combining a previous account with your new employer plan can increase the amount available for plan loans if necessary. You should first weigh the pros and cons of a 401k loan and consider the downsides, such as potentially refinancing a high-interest-rate debt.
The rule of 55 allows people who leave a job in the year they turn 55 or later to remove funds from their employer’s 401(k) or 403(b) without having to pay a 10% early withdrawal penalty. Considering the rule of 55, rolling over your previous plan into a new plan is a better option than rolling it over to an IRA. Additionally, the rule of 55 withdrawal penalty exception only applies to the retirement plan with your current employer. Keep in mind that early withdrawals are still subject to mandatory 20% federal tax withholding and, in some cases, mandatory state tax withholding.
Another scenario where it may be advantageous to transfer 401(k) funds to your new employer plan is related to back-door Roth contributions. If your income surpasses the limits for contributing to a Roth IRA and you intend to employ a back-door Roth strategy, keeping all of your pre-tax retirement funds in an employer plan helps evade the account aggregation regulations during Roth IRA conversions. This prevents the accidental taxation of traditional IRA assets, which often surprises people during tax season when they use this strategy for the first time.
One more benefit of moving your 401(k) retirement funds to your current employer’s plan is lower investment fees. In the past, it was often recommended that people should transfer their 401(k) assets to an IRA due to fees. These days, however, especially with larger employer plans, the fees for investment options in a 401(k) plan are usually lower compared to similar options in an IRA. Many employer plans offer low-cost mutual funds and index funds that are cheaper to own than those available in individual accounts. To determine if this applies to your situation, check the expense ratio of the funds offered in your new employer’s plan.
When evaluating options for your old 401(k) retirement account, it can become challenging to determine which path forward is right for you. By consolidating your accounts into your new employer plan, you may ensure a smoother and more efficient retirement savings journey.
Should you need help considering your 401(k) retirement account rollover options and the related tax planning implications, please reach out using the Free Consult button.