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  • July Article: Investments

    By Rachel Byers, Full-Time Faculty, Kaplan University 
    Published July 2014

    There are countless reasons people leave their current employer. Whatever the reason may be, an important thing to remember when separating from your employer is your 401(k). You have several options for moving (or not moving) your 401(k) assets when you leave a company. Every situation is different, so each of the options presented below should be carefully examined to determine which would benefit you the most.

    Before detailing your options, it is important to note a few pros and cons of two types of retirement savings avenues.

    Traditional Individual Retirement Accounts (IRAs) 

    Pros:  

    • Money invested (or rolled over) into IRAs is not taxed in the current tax year.  
    • IRAs generally offer more investment options and give the participant more control over diversification and risk. 
    • You may take distributions for any reason (although they will be subject to taxes and possibly penalties). 

    Cons: 

    • IRAs can have high administrative fees. 
    • Distributions before age 59 ½ are usually subject to a 10 percent early withdrawal penalty. 

    401(k) Plan 

    Pros:  

    • Money invested (or rolled over) into 401(k) plans is not taxed in the current tax year.  
    • 401(k) plans allow you to take interest-free/low-interest loans against your savings. 

    Cons: 

    • 401(k) plans generally have more limited investment options compared to IRAs. 
    • You can only withdraw funds from a 401(k) for specified hardships. 

    Now that you are equipped with this information, let’s review your options!

    Rollover into an IRA 

    The first option you have is to roll over your 401(k) retirement savings into an IRA. This is the most widely used option, but may not be the most beneficial. A few key things to consider: What are the fees associated with the IRA? Who will manage the investments?

    Rollover into new employer’s 401(k) 

    This option is very similar to the first option in that it allows you to roll the money over tax-free. However, there are some differences because this is a 401(k) and not an IRA. A few things to consider: Does the plan offer adequately diversified investment options? Will you possibly need to withdraw your money before age 55?

    Keep savings in old employer’s 401(k) 

    Again, this option avoids taxes in the current year. Keeping it in a 401(k) provides the drawbacks and benefits listed above. However, keep in mind that companies switch 401(k) plan providers. When you are no longer employed there, it may be difficult to track down your account if this were to happen.

    Cash out 

    Taking your money out as a lump sum is an option some might consider. If the amount is small and you are in need of cash, this may be the best option. However, you will pay tax on the amount distributed at ordinary income tax rates. In addition, if you are under age 55 you will pay an early withdrawal penalty. Further, the money will no longer enjoy tax-deferred earnings. 

    In general, these are the four options one should consider when leaving a company. Some additional options do exist, such as transferring assets into a brokerage account, rolling over into a Roth IRA, etc. However, these options should be carefully reviewed with your financial advisor. 

    Rachel Byers is a full-time faculty member at Kaplan University. The views expressed in this article are solely those of the author and do not represent the view of Kaplan University.

    _____________________________________________________________________________________________

     

    We encourage you to share this article if you learned anything (#TIL) or found this useful information. 

    If you are interested in other related financial topics, we invite you to take a look at Kaplan University's Center for Excellence in Financial Services and our Career Moves site, each of which periodically publish new articles and other content on this subject. 

    And if you are considering a business degree we invite you to find out more about our School of Business and explore Kaplan University's undergraduate and graduate degree offerings.

     

    Back to Center for Excellence

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