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You’ve probably heard of The Great Resignation with an increase in the number of people leaving their jobs over the past year. Whether they embark on the search for a new job with guaranteed remote work or completely change their career paths, Americans are emerging from the pandemic by reassessing their professional lives and making big changes.
As we head into a new year, the boiling job market doesn’t seem to want to calm down. Before you consider joining this latest workforce trend, however, pay attention to how your retirement plan will be affected. This includes knowing your 401 (k) options when you change jobs – whether you want to withdraw money, leave the money in your previous employer’s plan, switch to your new employer’s plan, or switch to an IRA. – while making sure you do nothing. errors during the process.
“Making the right decision is key,” says Ty Young, Founder and CEO of Ty J. Young Wealth Management, one of Atlanta’s largest wealth consulting firms. In fact, he sees four common mistakes employees make with their retirement funds when they quit their jobs and start a new one. Here is how you can avoid them.
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Mistake 1: Having multiple 401 (k) s in different places
“People have had – and can have – one, two, three jobs in this era of ‘The Great Resignation’, which means multiple 401 (k) in different places,” Young said. “They have to consolidate these 401 (k) in one place.”
If you’ve quit a string of jobs over the years, it’s easy to leave a trail of 401 (k) accounts you didn’t know what to do with. To simplify your life, merge them. You can easily simplify the management of your portfolio when you consolidate your retirement accounts from various former employers in one central location. Additionally, portfolio rebalancing and mandatory account withdrawals are easier to do when you only have one retirement account instead of three.
You can combine 401 (k) s and other accounts in a Rollover IRA with brokers like Charles Schwab, Fidelity Investments, Ally Invest® and Wealthfront. When you “renew” your 401 (k) accounts, you can choose to invest the funds in a Traditional IRA or a Roth IRA. The main difference between a traditional IRA and a Roth IRA is how they are taxed. (Read Select’s guide on the difference between a Traditional and Roth IRA.)
Riding on a 401 (k) is pretty easy to do. You can transfer the money from your old 401 (k) to your new employer’s 401 (k) plan or to an IRA account. Each broker has their own process, but most of the time you can do it online these days. Your best option is to go for a direct rollover where the funds go from your 401 (k) to a new retirement account so that you don’t touch them (which could lead to withdrawal fees). You have 60 days, according to the IRS, from the date you receive an IRA or pension plan distribution to transfer it to another plan or IRA.
Mistake 2: cash out too early
Finding another job is no excuse to tap into your old 401 (k) account.
Early withdrawals from your 401 (k) – that is, withdrawing money before the age of 59 and a half – are taxable, an additional penalty of 10% (exceptions apply) and a mandatory federal withholding rate of 20%. Plus, receiving early cash distributions means your savings will no longer grow tax-sheltered and you’ll use up any nest egg you might need in retirement.
Mistake 3: Not taking the free money
When looking for a new job, be careful that your potential employer offers a 401 (k) match. Given that Most employers who offer traditional 401 (k) plans match a portion of their workers’ contributions, you are likely to qualify for this benefit.
Young advises workers with a 401 (k) match to know exactly how much they need to contribute to get 100% of that match – and to prioritize investing that amount on day one on the job. For example, if your business is up to 6% of your salary and you contribute 6%, you double what you can set aside.
Error 4: Accept the default 401 (k) investment allocation
When changing jobs, take the time to maximize your new 401 (k) pension plan and understand the investments it offers. Young encourages employees to review their 401 (k) investment choices and fees to ensure they match their risk tolerance, age and retirement goals.
Typically, 401 (k) plans will offer mutual funds with varying risks, ranging from conservative to aggressive. It’s often up to the employer to dictate how often employees can make investment changes in their 401 (k), whether daily, monthly, or some other interval. When setting up your new account, you’ll want to make sure you’re maximizing your match and building a diverse portfolio so that your money does the heavy lifting for you.
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Information on Charles Schwab, Fidelity, Alley invest accounts has been independently collected by Select and has not been reviewed or provided by the Issuer prior to publication.
Editorial note: Any opinions, analysis, criticism or recommendations expressed in this article are the sole responsibility of the editorial staff of Select and have not been reviewed, endorsed or otherwise approved by any third party.