While it sounds silly, too few people adhere to this concept of saving for retirement. Nearly half of all workers in the United States take the money out of their retirement plans and spend it when they change jobs, according to the Federal Reserve Board Survey of Consumer Finances.
Changing or leaving a job is the leading cause for Americans withdrawing their retirement savings. Americans that deplete their retirement savings each time they take a new job opportunity see their retirement timeline stretching further and further out of reach.
It’s usually with the best of intentions that employees get started saving for retirement with one job, only to cash out of the account with a job change. Cashing out depletes what you’ve saved. Taxes of 20% and penalties of 10% for early withdrawal of rollover-eligible distributions can take a chunk out of your nest egg, money that could be the foundation for greater savings, compounding throughout your work career and ultimately, providing for a more comfortable retirement.
If the rule of thumb holds true and the average worker changes careers a minimum of seven times, that’s seven times ‘boom to bust’ if precautions aren’t made. And those precautions start with adherence to the mantra, retirement funds are for retiring.
Leave money where it is
You have options when it comes to parking your retirement accounts after separating from one company to move to another. One option is to keep those funds where they are. Most companies allow you to leave money with their company after you’ve moved on. But you won’t be able to contribute any more money to the retirement accounts and you’ll have to track where those funds are as the accounts move. While leaving your money with a past company is the easiest option, it’s typically a poor long-term solution.
Rollover to new employer’s plan
Move your money to accounts where it can grow by rolling the funds into one of your new employer’s qualified plans. It’s easier than you think to withdraw money from one 401(k) or individual retirement account (IRA) and reinvest those funds into your new employer’s traditional IRA or other employer-sponsored plan.
Direct account-to-account rollovers have no taxes withheld from the account at the time of the transfer. Funds that come to you direct, however, may be docked 20% in withholdings for federal tax and you’ll have 60 days to rollover the amount. Talk with your financial advisor to construct the most tax efficient transfer of funds.
Rollover to an IRA
If your new employer’s accounts cost more than you want to pay or don’t include the investment alternatives you are looking for, you could move your money to an IRA or ROTH IRA. Traditional IRA funds are contributed on a pre-tax basis and grow tax-deferred over time. Contributions and investment gains are taxed when you withdraw the money at or after age 59½. Early withdrawals may be subject to penalties.
Roth IRAs are taxed when contributions are made, eliminating the tax implications for contribution withdrawals once you reach age 59½. Work with your financial advisor to best manage the income caps and contribution limits that come with these accounts.
Execute the rollover
Pave the way for a smooth job transition by starting the process to rollover your retirement funds before you leave your current place of business. Contact your financial advisor or HR department for the documents necessary to initiate the rollover and plan for where the funds should most tax efficiently go.
This way, as your career moves forward, so too will your retirement plans. Don’t hesitate to contact us if you have any questions, or need some guidance on this process.
Follow Us on LinkedIn
Photo by Harli Marten on Unsplash
This commentary on this website reflects the personal opinions, viewpoints and analyses of the Wambolt & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Wambolt & Associates or performance returns of any Wambolt & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Wambolt & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.
Wambolt & Associates provides links for your convenience to websites produced by other providers or industry related material. Accessing websites through links directs you away from our website. Wambolt & Associates is not responsible for errors or omissions in the material on third party websites, and does not necessarily approve of or endorse the information provided. Users who gain access to third party websites may be subject to the copyright and other restrictions on use imposed by those providers and assume responsibility and risk from use of those websites.