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Where to Transfer Your 401(k) After Leaving a Job - YouTube
Channel: Approach Financial
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When you change jobs, you typically get to choose what happens to your
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retirement savings. In other words, where do you move the money?
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You have several options and you might not be aware of all of
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them, so we're going to go over five different choices that are available
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to you, as you navigate this change, whether you're changing jobs or retiring,
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we'll also get into some of the pros and cons of each choice
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so that you can hopefully pick the one that fits you best.
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The thing that most people do is move the money to an IRA,
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that's not necessarily the right choice for everybody. And I have a video
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that does a deeper dive on the pros and cons, but at a
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high level, you just get a lot more control when you move the
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money into an IRA, it's an individual account that you control as opposed
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to a workplace account that your employer or your former employer controls
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for you... I think the thing that most people value most is the
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ability to choose the investments, or at least to have somebody else[if
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you hire an advisor for example], have them manage the investments in a
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way they want instead of just using the menu of investments available in
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the retirement plan. If you have an excellent retirement plan, then that
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might not be a factor, but in many cases, you can improve things.
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The other thing is, it is a lot easier to get access to
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your money. So with a typical IRA, you can maybe go online or
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make a quick phone call and ask them to transfer money right to
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your bank account or send you a check, but the process is not
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quite as easy if you leave the money with your employer.
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If you do that, then when you fill out a distribution request form
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or you call them up, they typically need to have that approved by
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somebody, and it can take a couple of extra days, sometimes longer or
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sometimes not, if it's a very efficient employer, but getting that money
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when you want to... Can be tricky. Before you make the move to
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an IRA, you want to carefully examine the fees and expenses and different
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risks that happen to be in each type of account. One of the
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things that is often available in an employer plan that you can't get
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in an IRA is a stable value fund that happens to pay a
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nice rate of interest, that's not always available, but if that's a feature
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that you have, you want to evaluate if that's something that you want
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to keep, so it might pay more than a Money Market Fund,
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for example, in your IRA, and if you happen to be extremely conservative,
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that's something to look at, and if you do decide to move the
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money, it's best to do it as a direct rollover to your IRA
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in most cases, maybe not in all cases, but what you want to be
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aware of is if you do cash out and get a check payable
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directly to you and... Yes, they still do write checks, they will typically
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withhold 20% for federal income taxes. That's mandatory tax withholding,
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and that might be something that's difficult for you to come up with
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as you replace those funds in your account, so be aware of that
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if you decide to do a rollover. Now, just a quick reminder,
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this is just one short video, I can't possibly cover everything comprehensively,
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so please check with a professional who is familiar with your situation
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with your retirement plan and with your personal finances, and that way
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you reduce the chances of any problems. So where exactly should you open
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an IRA, if you decide to go that route? Well, you have a
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lot of options. One is just to use one of the major brokerage
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firms, the ones you've probably heard of that can allow you to invest
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in mutual funds and ETFs and just build your own portfolio.
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You can also hire an advisor to do things for you,
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and they will typically have you open an account at a custodian that
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they use. You can use robo advisors if you are so inclined,
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or you can open an IRA at a bank or a credit union.
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If you do that, you're typically going to be investing in CDs and
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savings accounts, unless they have a separate investment branch where they're
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going to send it to a different firm that holds the investments and
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you're representative at the bank or credit union would manage the money
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for you. You can also move money to your next jobs plan,
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so if you're not retiring but you're just changing jobs, your next job
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might have a 401k, for example, and you could roll the money from
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the old plan into the new one, that can be helpful just if
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you want to keep things simple, have his few accounts as possible and
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less to keep an eye on. Plus if you ever do want to
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borrow against your 401K balance, not saying that's a good idea necessarily,
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but you would have a bigger balance that you could borrow from,
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but once again, before you make that change, you do want to carefully
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scrutinize the fees and the investment options and other features of the
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plan and be aware that you might not be able to get your
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money back out of the plan if you move it in there,
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sometimes your roll over balance is available for you to take at any
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time, but that's not always the case. So just double check if you
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decide to cash out, you can just send the funds directly to a
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checking your savings account. Now, be aware that this often has some tax
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consequences. I mentioned the 20% withholding, so check on that before you
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do it, and you may owe income taxes plus additional penalty taxes if
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you're under a certain age, so just be very careful and make sure
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that's the right choice, if you want and you're actually going to spend
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some money soon, you could send that money to an IRA first and
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then take out the amount you need, not necessarily cashing out the whole
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thing. Or your former employer might allow for a split distribution,
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and in that case, you would ask them to send you a portion
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of the cash and then they roll the remainder over to an IRA,
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and that way you minimize the tax consequences. Next, you've got annuities,
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and these are products from insurance companies that can provide certain
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guarantees, and you know that the simplest, most straightforward annuity
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is something that pays you income for the rest of your life,
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so you might want to get some guarantees in that way,
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you don't worry about what the markets do. However, there's no such thing
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as a free lunch. So you want to be aware of some of
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the trade offs of annuities. This is not a long enough video to
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give this a full treatment in terms of the pros and cons,
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but I do have other videos out there for that. Just be aware
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that you may lose some flexibility, you may be paying fees and expenses,
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and you can't really tell what you're paying in most cases,
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so be sure to check with a number of different insurers or with
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a really trusted financial professional if you decide to go this route.
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The next option is to just leave the money with your former employer,
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and that might be something you do if you just don't know what
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to do yet, or if you really like that retirement plan,
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if they've got an excellent low cost plan with good investments that might
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be something worth considering. So you might need to have at least $5,000
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in the plan to do that, in some cases, if you have less,
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they can eventually force you out of the plan, so you want to pay
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attention if that's the case for you, and again, just be aware that
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when you leave it with an old employer, you kind of want to pay
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attention because you're not controlling the investment options or even
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the vendors they use with the retirement plan, so if they decide to
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move it, that's something you're going to want to keep up with.
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Did they move it to a better place or a worse place?
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That sort of thing. So now you know at least five options you
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can work with. If you found this helpful, please leave a quick thumbs
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up and take care.
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