You might be working under various employers from time to time. But what about the 410(k) retirement plan that you've with your employers? Lot of people are confused as to whether or not they should leave the account as it is or roll it over into an IRA account. Let's check out which is the best option to go for:
Leave 401(K) with your ex-employers:
It is better not to keep your retirement savings with your ex-employers. One of the main reasons for it is that after 2-3 job switches, you will find your money is spread across various 401k plans and that too at different places. This may make it difficult for you to plan your investment strategy for retirement. However, there can be some cases wherein it would be a better option to leave your 401(K) with your ex-employer. Check out the reasons:
- Move to another job within short time period: If you feel that you would be able to get a job within a short period of time, then it's better to leave the 401k with your ex-employer. You can get a new job and then transfer the old retirement plan into your new employer's plan provided he allows the rollover money.
- Closer to retirement age: If you're closer to your retirement age, it's better to leave your money with your ex-employer. If you are under 59 and ½ years of age and transfer balance into IRA and then withdraw money from IRA to meet your expenses, you will have to pay income tax. Also, you would be responsible for paying 10% penalty.
If you are withdrawing money from your company's 401(k) account, you won't be responsible for the 10% penalty provided you're 55 years or more of age. However, you'll still be responsible for paying income tax on taxable amount that you withdraw.
Rolling over 401(K) into an IRA:
It is always better to roll over your 401(K) balance into an IRA. You can request your ex-employer to do a direct transfer or a trustee to trustee transfer of your balance 401k amount into the IRA. However, if your ex-employer does not do so and pays the balance amount to you, then you may become liable to pay 20% withholding tax.
Roll over 401(k) into Roth IRA:
You can definitely roll over your entire 401(k) retirement plan or a part of it into a Roth IRA. However, you must understand that if you do so, you will be liable to pay income tax on the taxable portion of the amount that you transfer in the Roth IRA.
Cashing in 401(k) Retirement Plan:
In my opinion, it is not a good option to cash in your retirement plan when you lose your job or leave your current employer. If you do so, you'll have to pay a penalty of 10% and also income taxes. There is a high chance that liquidating 401k can also hamper your retirement security. Unless you do not have any other way out, it's better not to liquidate your 401(k) account.
Thus, whenever you switch jobs, you can request your former employers to transfer the remaining balance in your 401k account to the IRA. This will help you in planning for your retirement in a better way.