Leaving (or Left) Your Job?
Navigating Your 401(k) ‘During The Great Resignation’
The last few years have been a rollercoaster ride of changes. Our personal lives have transformed in ways most of us likely never imagined. Our work lives have shifted, and our businesses have pivoted to keep up with what seems like an infinite loop of Covid testing our sanity. This unprecedented worldwide event even earned a few nicknames, one being “The Great Resignation,” due to the potential for a mass exodus in the workplace. According to a recent study by Bankrate, 55% of Americans anticipate finding another job1. If you are part of that statistic, here is a checklist for leaving your job (or getting laid off) that could help strengthen your financial future as you navigate this Twilight Zone episode.
1) Find out if you can keep your 401(k) plan with your current employer.
You have important choices to consider if you are moving on. Not all employers will allow you to keep your 401(k) plan with them if you’re no longer with the company. Find out if it is a possibility so you can figure out what works best for you. If you’re not yet 59 ½, we don’t recommend cashing out your 401(k) because you’ll incur a 10% early-withdrawal penalty2. If you land a new job and your employer has a 401(k) plan, you’ll also have the choice to consolidate your old 401(k) with their new plan. Depending on how you have the money moved, your former employer may have to withhold some of it for tax purposes even if you’re trying to transfer the entire balance to another 401(k).
Does a 401(k) withdrawal count as income? In most cases it does, so if you want to withdraw early that penalty would be on top of income tax if you don’t qualify for an exemption. If you do decide to leave your 401(k) plan where it is, you will no longer be able to contribute to it or benefit from an employer matching program. Any money vested by an employer may not be 100% yours unless you’ve been at the company for a certain period3. If you have an outstanding loan on your 401(k), it could become a taxable distribution that is subject to penalty if you don’t pay it back within the allotted period.
According to the Bureau of Labor Statistics, people born from 1957-1964 held an average of 12.4 jobs by the time they turn 54.4 It’s no wonder that there are $1.35 trillion (24 million accounts) in forgotten 401(k) assets.5 You can do a search on the National Registry of Unclaimed Retirement Benefits if you think you’ve lost track of any old accounts6. Staying on top of your 401(k) when you’re in the process of changing jobs can save you a lot of frustration in the future.
2) Learn what your plan is invested in.
Each employer is different when it comes to 401(k) plan investments. It’s important to know what your plan is invested in so you can decide whether it’s a good fit for your financial goals going forward. Typically, your options are limited with a company plan, so there’s a good chance you have untapped potential when it comes to putting your money to work. If you’re on the hunt for a new job, you may want to find out if the employer offers investment options in their 401(k) plans, as not all of them do.
3) Understand your options.
If you don’t want to keep your plan with your former employer, rollover into a new employer’s plan or cash out you have two more options. You can roll the assets into a traditional IRA or a Roth IRA. With either account you’ll have a wide variety of investment options such as stocks, bonds, ETFs and annuities. While these accounts are similar, the crucial difference is when you pay taxes on your assets. Are 401K rollovers to an IRA taxable? No, if you rollover the entire amount into a traditional IRA, your assets remain tax deferred until you withdraw permanently.
With a traditional IRA you’ll pay taxes when you withdraw in retirement and deduct your contributions along the way. With a Roth you pay taxes up-front on your contributions and get tax free growth moving forward and on your withdrawals in retirement. You can learn more about the specifics on the IRS’s website.
The most important consideration in choosing a Roth or Traditional IRA is the long-term view of your income. If you think you’ll be in a higher tax bracket down the road a Roth IRA could be a valuable tax-advantaged vehicle because a retirement age withdrawal will not affect your tax bracket and your money can grow tax-free. If you’re taking a break between jobs or changing careers you probably will have a lower income that year. A Roth IRA rollover could be a good option for a low-income year because any qualified withdrawals in the future will not count as income which could be a good strategy if you’re earning more. Looking at a comprehensive view of your finances coupled with deliberate planning gives you the ability to use these vehicles to your advantage. With a Roth, it’s all about timing when you’re going to claim taxes.
Just remember that even if you’re years away from retirement, the decisions you make today could have a substantial impact on the future of your finances. Know all your options and design a plan that works best for you and your family. We’re here to help if you have any questions along the way. Schedule a quick call or complimentary consultation with a member of the Wolfgang Capital Family here.
Fee-based financial planning and investment advisory services are offered by Wolfgang Capital LLC, a Registered Investment advisor in the State of California. Insurance products and services are offered through Wolfgang Financial Group LLC dba Wolfgang Financial and Insurance Agency (CA LIC # 0K07551). Wolfgang Capital LLC and Wolfgang Financial and Insurance Agency are affiliated companies. The opinions expressed in materials available in this blog are subject to change without notice. Neither Wolfgang Financial and Insurance Agency or Wolfgang Capital LLC provide legal or tax advice. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Wolfgang Capital LLC and Wolfgang Financial and Insurance Agency are not affiliated with or endorsed by the Social Security Administration or any government agency. This content is for informational purposes only and should not be used to make any financial decisions.
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