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What should I do with my 401(K)?

Spinning workers’ hay into retirement gold

Great news! You’ve just fast-tracked your career with a new job that is more hands on – and pays more. Better still, you’re looking forward to retirement. Among the list of tasks as you transition from your old job should be what to do with your 401(K) tax-advantaged retirement savings plan with your former employer.

Spinning workers’ hay into retirement gold

According to the Bureau of Labor Statistics, nearly seven in 10 U.S. private industry workers have access to 401(K) retirement plans through their employers, yet just half contribute to one. Among government workers, participation is higher – 8 in 10 workers.

Participants contribute a percentage of their pre-tax pay, typically 3 to 4 percent of annual salary that employers often match dollar for dollar with limits. For 2023, the individual contribution limit is $22,500 -- $2,000 more than 2022.

Do you roll it over or keep it in place?

The federal government allows a 60-day window to decide what to do with your 401(K) nest egg. You have a handful of options, each with upsides and downsides.

Choosing the right one comes down to which option makes the most financial sense for you, depending on whether you’re near or at retirement.

Benefits of keeping your 401K with previous employer

Your retirement savings is your money to do with what you please within the rules. But there are a number of reasons to retain your 401(K) plan with your previous employer.

  • Your previous employer’s tax-advantaged savings plan has investment options that are unavailable in your new employer’s plan.
  • You’re familiar with your portfolio of mutual funds, stocks and other investments as well as their performance to date.
  • Keeping your 401(K) account in place allows you time to scrutinize investment options and performance of your new employer’s retirement savings plan.
  • Any loan balances you have on your 401(K) may be immediately due and payable before you are eligible to transfer your account.
  • If you’re nearing retirement, leaving your retirement savings with your previous employer may make financial sense, especially if your portfolio is outperforming the market.

Reasons to transfer your 401K account

Should you choose to roll over your 401(K) into an Individual Retirement Account, in consultation with your financial advisor, here are a few more things to consider:

  • Most 401(k)s allow penalty-free withdrawals after age 55 for early retirees
  • With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty
  • IRA investors may pay more fees than they would in employer-sponsored plans

Is it worth delaying your 401(K) rollover?

You may opt to retain your employer-sponsored retirement savings in place once you leave your job. Rules allow former-employee 401(K) accounts with balances of $5,000 or more to remain with the employer as long as they want. Workers with balances below $5,000 have 60 days from their last day of employment to transfer funds into a preferred retirement-savings account.

Some things to consider before you act:

  • Investment returns will vary. The difference in performance between 401(K) plans vs. IRAs can be substantial. Keeping your 401(K) in place (if that’s an option) may financially benefit you more over the long term. 
  • Early retirement. Most 401(k)s allow penalty-free withdrawals after age 55 for early retirees. With an IRA, you must wait until 59 ½ to avoid paying a 10% penalty.
  • You can borrow against your 401(K). If you are in a financial pinch, it’s possible to borrow against your 401(K). In contrast, loans against IRAs are not allowed. Bear in mind, however, any outstanding borrowings against your 401(K) must be repaid in 60 days. After that, it is treated as a disbursement that is subject to a 10 percent penalty and income taxes.

Sorting your retirement future together

Informed decisions about your 401(K) and other retirement savings are difficult and too important to make on your own.

At Andrews Federal Credit Union, our team of investment advisors are ready to provide you with all the information and wealth-building products you need to be financially secure in your retirement.