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Exploring Options For Your 401(k)

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Now over the last year and a half the job market has been, and continues to be, “unprecedented,” as many people lost their jobs during the pandemic.

However, with the economy reopening, there are widespread reports of workers re-evaluating their current employment and seriously considering making a change. And those with a 401(k) or similar retirement plan, will be facing decisions about what to do with their savings when they do leave a job.

Here to help us understand and navigate the possible choices – along with their implications – is Catherine Collinson, CEO and president of nonprofit Transamerica Institute®.

So Catherine, what options are out there for people who have recently left a company where they have had savings in a 401(k) plan?

Catherine Collinson:

In a nutshell, there are four options:

1. Keep your 401(k) with your former employer, if possible.

2. Roll the money over into an individual retirement account or IRA.

3. Roll the money over into a 401(k) with your new employer.

4. Or —and I don’t recommend this—you can cash out the account and be subject to income taxes and a possible 10% penalty fee if you are under age 59 ½.

Al Waller:

That’s pretty straight forward, but then how does someone go about deciding which option is best for them?

Catherine Collinson:

There are risks and benefits to each option, so ask questions, do your homework, and avoid making an emotional decision. It’s important to weigh the factors such as the available investment options, services offered, and associated fees.

If you’re considering rolling your account balance into your new employer’s plan, it’s important to keep in mind that the rules for your new employer may be different than the former. In fact, some employers won’t accept a rollover from a previous plan. What may seem like a simple decision at face value could affect the long-term growth of your retirement savings.

Al Waller:

If someone does choose to rollover their balance, how would they go about doing that?

Catherine Collinson:

Whether you choose to open an IRA or go with your new employer’s plan, the easiest way is to request a “direct rollover.” That’s when your former employer’s retirement plan administrator directly transfers the payment to the other account – either at your new work or in a rollover IRA.

Al Waller:

Do you have any further observations for our listeners before we tie things up today?

Catherine Collinson:

Yes. Many employers have the ability to automatically cut a check and essentially cash out 401(k) balances of less than $5,000. If this happens to you, there is what’s called the 60-day rule that allows you up to 60 days from the date you receive a retirement plan distribution to roll it over to another plan or IRA.

It’s important to remember that even for smaller balances, rolling the assets to another retirement plan or IRA can help you continue to save for the future and grow your savings on a tax-advantaged basis.

Al Waller:

As they say, every little bit helps! Catherine, thank you as always, for sharing these insights and information. That’s all we have time for here on ClearPath – Your Roadmap to Health and Wealth.

Until the next time, this is Al Waller on WYPR, your NPR news station.

Thanks for listening!

Clearpath is paid for by The Transamerica Institute

Al Waller is a long time native of the Baltimore area. He entered the field of Human Resources Management starting as an HR Generalist with PwC (Pricewaterhouse-Coopers). This marked the beginning of a 30 year career that advanced into the management level for locally and globally based corporations. His primary area of expertise has focused on but not limited to: Talent Acquisition /Retention, Employee Relations as well as Training & Development.
Catherine Collinson serves as President of the Transamerica Institute and Transamerica Center for Retirement Studies, and is a retirement and market trends expert and champion for Americans who are at risk for not achieving a financially secure retirement. Catherine oversees all research and outreach initiatives, including the Annual Transamerica Retirement Survey.