Job growth in the technology industry has been at a fever pitch for almost a quarter of a century and still is today. However, with companies competing for top talent, IT professionals have opportunities to change their career paths for the better.
But when you leave one company for another — especially if you were there for a long time — you’ll inevitably have to tie up loose ends related to your employment. One of the most crucial to address is your employee retirement plan, whether it’s a 401(k) or IRA.
Transitioning to a new job is always a hectic time. But it’s also a prime time to set yourself up for a winning retirement. So what can you do to succeed?
Veteran financial expert Ty J. Young, CEO of Ty J. Young Wealth Management, has some thoughts on your choices and the best paths forward.
4 Retirement Plan Options When You Change Jobs
When you’re orchestrating your exit from your earlier job, Young says you generally have four choices for what to do about your old IRA.
Cash Out
It’s possible to cash out your old employer’s 401(k) plan and get the funds reimbursed by check. If your account balance is less than $1,000, you should be able to withdraw the funds (although it may take 60 days to get the check).
But if the balance is more than $1,000, your old employer may not be allowed to pay it to you. No matter what, your withdrawal will be taxable, even if the balance is less than $1,000.
Cashing out early on larger 401(k) balances can also come with stiff penalties. For example, if you resign from the company before the year you turn 55 and haven’t reached the age of 59½, you’ll face a 10% charge for early withdrawal, plus taxes.
Stay with Your Old Plan
If your 401(k) balance with your old employer is more than $5,000, you can choose to keep it active even when you jump to a new company. But it’s rarely (if ever) a good idea.
By leaving your old retirement plan in effect, you have few choices for managing your account. You also depend on investment income to grow — you can’t contribute above a certain amount, and your old employer no longer contributes anything.
If your old retirement plan balance is between $1,000 and $5,000, you may not even have a choice to stay with it. The company may very well move your funds to a separate IRA under your name.
Roll Over to the New Employer’s Plan
You might consider simply transferring your old plan’s balance to the new employer’s 401(k) or IRA plan. In some cases, a rollover might seem the best possible outcome. But it has potential drawbacks.
Your new employer might not allow transfers from an old 401(k). If they do, you may need to fill out a pile of paperwork. There’s a lot of red tape to sort through, depending on how much you’re transferring, your account history, tax status, and the investment choices you have at the new organization.
There’s also the very real chance your new employer’s retirement plan will have higher fees than your old one.
Roll Over to Your Own IRA
The fourth choice is to have your old employer’s funds transferred to an independent IRA under your name. As mentioned above, this choice might be your only option if your old IRA balance is between $1,000 and $5,000.
However, that could be the best choice. With total control over your investment strategy and allotments, a self-managed IRA gives you the freedom to chart your financial planning the way it works best for you. As a result, you have unlimited options and a real opportunity to craft a winning retirement.
Maximizing IRA Value
The best practice for getting the most value from your IRA, Young says, is to “use winning strategies that are common for your portfolio.” He strongly suggests framing the IRA around a set of objectives called the “Three-Legged Stool”:
Income
In retirement, having a diverse number of income sources is the key to success. Therefore, your IRA should have revenue streams from a wide variety of funds and commodities across several sectors.
Growth
Living expenses in retirement are subject to cost-of-living increases and inflation. Therefore, your IRA should be driven by a consistent and robust strategy for continued growth to keep up.
Protection
Investment markets are always susceptible to “corrections” — economic events that can wreak ruin on your hard-won revenue. But an IRA can survive those shocks to the system with a plan to protect growth.
Will Your IRA Fees Change When You Leave the Company?
You may face different fees when you switch companies. This is because every company has a different investment strategy. Depending on the scope and breadth of your new company’s IRA plan, your fees may swing higher or lower.
“(The fees) should remain the same if you keep the same plan, however,” Young says. “High fees will remain high; low fees will remain low.”
The best way to manage this issue is to learn as much as possible about the new company’s IRA plan in advance of accepting an offer. Then, the prospective company’s human resources department should be able to answer that question in full.
Fundamentals to Consider Before Switching to a New Company
Young says to think about a few essential principles before taking on a new job, whatever choice you make. These principles will go a long way toward ensuring a winning retirement.
Use the Three-Legged Stool
Diversify income, focus on growth, and protect your wealth.
Stay with a Tax-Deferred Plan
Keep contributions to your IRA account tax-free while you’re employed. If your old employer had a tax-deferred plan, it’s best to maintain that choice when switching over to a new one.
Have a 50/50 Investment Strategy
Winning retirement portfolios blend wealth-building opportunities with fundamentals that manage risk and protect income. Allocate half of your IRA to income instruments like ETFs and overlay plans and reserve the other half for principal protection products.
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