Understanding Your Retirement Options
Whether you are going to work for someone else, starting your own business, or leaving your employer for some other reason, a job change can be a major life event that carries important implications when it comes to your retirement planning. If you are contemplating a change or have already made the leap and need some guidance as to what comes next, Kris Montgomery at Alpha Crypto Consulting can help you find the right solutions.
When you leave your employer, you essentially have four options as to what to do with your 401(k):
- Cash out your 401(k).
- Keep your 401(k) with your former employer.
- Consolidate your 401(k) with your new employer’s plan.
- Rollover the funds from your 401(k) into an Individual Retirement Account (IRA) or convert to a Roth IRA.
Each of these options carries its own unique advantages and disadvantages. We can help you decide which option is best for you.
About Cashing Out Your Retirement Accounts
Generally speaking, this is almost always a mistake because of the tax implications. The money you receive will be first taxed as ordinary income according to your current tax rate. In addition, you may also face an additional tax penalty of 10%. You can only avoid the 10% penalty in two situations:
- You are at least 55 years old and no longer working.
- You are still working but at least 59 ½ years old.
That said, we understand that sometimes people need to access these funds as a result of being laid off or some other emergency. In these situations, we can help you understand your options and minimize the tax liabilities.
Should You Keep Your 401(k) with Your Former Employer?
Some employers will allow you to remain invested in their 401(k) even after your departure. This can be a good option if, for example, your new employer doesn’t offer a 401(k) or the new plan offers fewer advantages than the one offered by your prior employer. Keeping your 401(k) with your prior employer can be particularly attractive if you have made the leap to self-employment.
While keeping your 401(k) with your prior employer allows you to maintain consistent performance and avoids the hassle of setting up some other fund, it’s important to remember that there may be disadvantages as well. For example:
- Tracking multiple retirement accounts can become difficult and you may find yourself unable to devote the necessary time to ensure your funds are performing as you expect.
- You will no longer be able to contribute to your prior employer’s plan or receive matching contributions. Matching contributions is one of the primary benefits of employer-sponsored 401(k) plans.
- Your withdrawal options may be limited. You may no longer be able to make a partial withdrawal or obtain a loan against the fund. Your only option may be a complete liquidation of the fund.
At Alpha Crypto Consulting, we can help you make an informed decision as to what to do with your 401(k) as you change jobs and move through life. We can explain whether it makes sense to keep your current 401(k) or consider some other options.
Should You Roll Your Current 401(k) into Your New Employer’s 401(k)?
If your new employer offers a 401(k) and allows immediate rollovers, this may seem like the obvious choice. The plan’s administrator can guide you through the process and help manage the fund. In addition, you will be able to continue to make contributions and, if available, receive matching contributions. Furthermore, establishing automatic payroll contributions can make it even easier to continue to fund your retirement without interruption.
However, you want to be careful that you aren’t moving into a plan that offers fewer investment options, has higher fees, or doesn’t include matching contributions. In short, moving your 401(k) into a limited plan means that you may be foregoing better options.
At Alpha Crypto Consulting, we can help you compare and contrast your current plan with the plan offered by your new employer. We can then help you decide whether moving to your new employer’s plan makes sense, or whether you should pursue some other option.
About Rolling Over a 401(k) into an IRA
For many people, rolling over their 401(k) from their previous employer into an IRA is the best option. IRAs offer greater control and more choices over what is offered by most 401(k)s while providing very similar benefits for retirement planning. With IRAs, you can invest in almost any type of asset such as stocks, bonds, mutual funds, and annuities.
If you are considering moving into an IRA, you then need to decide which type of IRA you want to fund: (1) a traditional IRA or (2) a Roth IRA. There are important differences between these two types of IRAs, so it is important to give them careful consideration.
About Traditional IRAs
Similar to a 401(k), traditional IRAs are a pre-tax investment – any funds paid into an IRA are tax-deferred and can be used to reduce your taxable income. You will pay taxes when you make withdrawals, and will also pay a 10% penalty if you withdraw the funds before you turn 59 ½ . In addition, you must begin making withdrawals once you turn 72. Because 401(k)s are also tax-deferred, rolling them over into a traditional IRA is relatively straightforward and often makes the most sense for many investors.
About Roth IRAs
The main difference between traditional and Roth IRAs is that converting to a Roth IRA is an immediately taxable event. In other words, you will have to pay taxes once you roll your 401(k) into a Roth IRA. That said, Roth IRA’s are attractive to some investors for the following reasons:
- Any subsequent earnings or withdrawals will be tax-free;
- There are no lifetime distribution requirements, meaning that you can leave the funds in the account as long as you like, and the account can be inherited by your heirs.
Deciding which type of IRA best fits your needs is an important decision. An experienced financial planner can help you make the right decision.
Questions About Your 401(k)? Talk to Us.
At Alpha Crypto Currency, our goal is to form lifelong relationships with our clients so that we can guide them through their important life changes. To discuss your options with our current 401(k), give us a call or send us an email to schedule a consultation.