Few situations in life are more stressful than a job loss, and chances are if you find yourself in this situation, your 401(k) account is the last thing on your mind. However, after taking the time to breathe, assess your job prospects, update your resume and find a new, hopefully better, position, your thoughts should turn to your previous workplace 401(k) account.
When considering what to do with your 401(k) account from your previous employer, you have several options depending on your savings, investment and retirement goals. Depending on your situation, consider one of the options below for your next steps. By no means are these three options the only things you can do with your money, but I've found these to be some of the most popular.
One of the most popular things to do with a 401(k) plan is to roll over your money to the 401(k) provider for your new employer. A rollover to your new workplace 401(k) plan is an excellent option if you value simplicity and would like to see all of your 401(k) savings in one place.
For younger employees, who are more likely still growing their contributions and savings, this is a particularly good option, as it keeps all of their money in one place and makes it easy to see the growth of their overall retirement portfolio.
Another popular option when transitioning from one job to the next is to roll over your previous 401(k) to an individual retirement account, or IRA. IRAs can give individuals more control over the types of investments they make inside of their retirement accounts. Depending on your investment goals, a self-directed IRA may be appropriate for those who want to invest more aggressively or in different asset classes outside stocks, bonds and mutual funds.
Another vital component to consider when evaluating an IRA provider is the fees that they charge either on the amount of money you are funding your IRA with or on the investments held within your IRA.
A silver lining in the event of a job loss, and thus a potential drop in income, is the ability to complete a Roth conversion at a lower tax bracket. A Roth conversion is taking money that was contributed pre-tax and deducted from that year's earnings and paying income taxes on those earnings. The advantage of doing this is that at retirement, you would pay no income taxes on withdrawals or gains on the funds in that account. With a traditional account, you must pay income tax on the withdrawals.
A Roth conversion has multiple advantages apart from tax-free earnings and withdrawals. For starters, a Roth IRA can grow tax-free longer since Roth IRAs do not have required minimum distributions, which traditional IRAs do.
A lesser-known and valuable component of a Roth IRA is the ability to leave a tax-free inheritance for your heirs. While heirs are subject to required minimum distributions, the withdrawals are tax-free as long as the account has been open for at least five years.
Regardless of what you decide is best for you and your situation, it is vital to keep track of your retirement accounts. One estimate places the number of unclaimed 401(k) accounts at 900,000 nationwide each year. If you happen to have an unclaimed 401(k) plan from a previous job, the simplest way to find it is to contact the HR department of your prior employer. Even if you decide to leave a 401(k) plan with a previous employer, it is important to keep tabs on where your money is and how it is working for you and your future retirement.