Leaving a full-time job for a new gig presents a lot of opportunities. One must-do money to-do: Deciding how to handle the money you’ve saved in your old employer-sponsored retirement plan.
Most job changes fall into three categories — full-timers leaving to freelance, people jumping to a new full-time gig and those leaving to launch their own business. Here are the best moves to make with your old 401(k) in each scenario.
Options for freelancers
Do not cash out your 401(k). “That’s important advice for anyone, but it’s especially important for freelancers,” says Robin Hartill, Senior Editor and “Dear Penny” personal finance advice columnist at The Penny Hoarder.
It may be tempting to pull money from a 401(k) when you’re adjusting to life without a steady paycheck. But Hartill warns: “If you’re under age 59 ½, you’ll pay a 10% early withdrawal penalty plus income taxes. And, of course, you also miss out on growing your money for retirement.”
If your plan allows it, Hartill recommends leaving your money in your current employer’s 401(k) if you’re happy with the investment choices. (Contact the plan administrator (the company that manages your account) or your old HR department to find out.)
If you don’t like the investment options or aren’t allowed to stick with your old plan, roll your 401(k) balance into an IRA. If you go that route, ask your plan administrator (or the institution where you’re opening a rollover IRA) to do a direct rollover. “A direct rollover means the money goes directly from your old 401(k) to the new account. You risk being hit with taxes and fees if the check goes to you,” Hartill says.
Even though you no longer have a formal workplace retirement plan, continue to save for your long-term well-being. “Even if you keep your money in your old job’s 401(k), it’s absolutely essential to open an IRA as a freelancer so you can continue to save for retirement in a tax-advantaged account,” Hartill says.
What to do if you’re moving to another full-time job
Today, more people than ever are changing jobs, with 64% of employees changing jobs at least once every two years in order to gain a higher salary. When you make the switch to a new role you have three main options for handling your old 401(k):
- Put the money into an IRA: If you want more control over your investments or you want a retirement account that’s not tied to your job, an IRA rollover is your best option.
- Roll it over into your new employer’s 401(k): Consolidation makes it easier to keep track of your retirement investments, especially if you’re a frequent job-changer,
- Keep the money invested in your old employer’s 401(k) if it’s allowed.
“Always check with both plans’ administrators about your options,” Hartill says, since not all plans allow former employees to keep money in the 401(k), and some plans won’t let you roll over funds from an old plan.
If both options are on the table, Hartill suggests comparing fees and investments on both plans to see what’s best.
Advice for small business starters
What’s the best way to handle an old 401(k) if you’re striking out to be your own #GirlBoss?
The simplest answer, according to Hartill: Go with the IRA rollover option or open a solo 401(k), as long as you have no other employees except you and (if applicable) your spouse.
A solo 401(k) you contribute to as both employee and employer, which allows you to save a lot more money in a tax-advantaged retirement account.
But there’s even more creative ways to grow your money. Marguerita Cheng, Chief Executive Officer at Blue Ocean Global Wealth, also points out that many people don’t realize they can have a SEP (Simplified Employee Pension) IRA in addition to their 401(k).
“People don’t realize they can have a Roth IRA & SEP IRA. How cool is that?” Cheng says, “People don’t realize that if they don’t have any employees (other than a spouse) that they can have a Single K/Solo K/Individual K. They can contribute exactly what they would to a 401(k) plan as salary deferral plus catch up contributions for age over 50. They can also have the profit sharing component aspect (like a SEP). It’s very powerful. If clients are worried, they can also add loan features. Certain plans don’t assess any fees for saying you like to have the option to have a loan. The fee of $50 for a loan may only apply if you actually take out a loan.”
There are a ton of great options out there, no matter how you are moving and shaking up your career. Consider talking to a financial advisor before moving your retirement account. For more on the topic, check out:
- Retirement Tools for Every Life Scenario
- IRA vs. 401(k): What’s the Difference?
- HerMoney Podcast: Retirement Plans for Small Businesses and more
STAY IN TOUCH!: Own your money, own your life. Subscribe to HerMoney today to get the latest money news and tips!