Planning for retirement can be both exciting and overwhelming. As you navigate the various aspects of your financial future, one important consideration is what to do with your old 401(k) account. Whether you’ve changed jobs, started your own business, or retired, your old 401(k) may be sitting dormant, waiting for your attention. So what should you do with your old 401(k)?
It is strongly advised to avoid withdrawing funds from retirement accounts unless there is a critical need for immediate cash and no other options are available. The consequences of such a decision depend on your age and tax situation. Generally, if you withdraw from your 401(k) before reaching the age of 59½, you will likely face both ordinary income taxes and a potential 10% early withdrawal penalty.
However, there is an exception to the early withdrawal penalty if you stopped working for your former employer in or after the year you turned 55, but are not yet 59½ (this exception does not apply to assets rolled over to an IRA). It is essential to carefully consider the implications and explore alternative solutions before making the decision to withdraw from your retirement accounts.
Leave it with your old employer.
What we say is that if you aren’t at your job your 401k shouldn’t be either! The bad news about the 401k is that it’s always limited in the type of investments you can use in it. While an IRA offers virtually the entire universe of options. So the rule is that if you aren’t at your job, you can rollover your 401k to an IRA. It’s simple and it doesn’t cost you any taxes. Once you roll it over and it’s in the IRA, you have many more options on how to invest it.
Roll your old 401k into your new employer’s plan
Consolidating your retirement savings from one old 401(k) plan into a your new 401k may seem like the best move since it sounds simple. But you are moving your money from one 401k with limited options to a new 401k with the same type of limitations. It’s usually best to just rollover that old 401k to an IRA that you control so you have many more options available instead of being locked into your new employers plan.
Roll your 401k into an IRA
Just like I mentioned above, a Rollover IRA provides the opportunity to transfer funds from your previous employer-sponsored retirement plan into an individual retirement account (IRA) held with a financial institution.
There are several advantages to utilizing a Rollover IRA. Firstly, your money can continue to grow tax-deferred within the account. If you are below the age of 59½, you may make penalty-free withdrawals from the IRA for qualifying first-time home purchases or higher education expenses. The flexibility of a Rollover IRA often allows for a broader range of investment options compared to employer-sponsored plans. Additionally, rolling over assets can be done by source type, enabling separate rollovers for Roth assets to a Roth IRA. By doing so, you can avoid the need to take required minimum distributions (RMDs) from those Roth assets as you would have in the employer’s plan.
However, it’s important to note that once you reach the age of 73, you will be required to take annual RMDs from a traditional IRA, even if you continue working.
Remember, the decisions you make today regarding your old 401(k) can shape your retirement lifestyle tomorrow.
You’ll want to check out my Youtube video where I was interviewed from Erin Kennedy about What You Should Do with Your Old 401k!
Here’s the link…
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