Changing jobs can be a busy and exciting time. Whether you’re just starting your job search or in the middle of transitioning to a new position, your life may be a little hectic right now.
When a job change is in your future, retirement is probably the last thing on your mind. However, don’t let your retirement savings fall by the wayside. It’s important to be aware of the complications that can arise during a job change, which can disrupt your retirement plan.
For many people, a 401(k) is one of their biggest retirement assets. The decisions you make related to both your old and your new plans could significantly affect your savings when you retire.
Below are a few tips to help keep your retirement strategy on track as you prepare to switch jobs:
Know your new 401(k) eligibility dates.
Talk to your employer to find out when you can start investing in the company’s 401(k) plan. There’s typically a waiting period before new hires become eligible to begin making contributions. The length of this waiting period could be anywhere from 30 days to a year.
It’s also common for there to be a delay on employer contributions so the company can make sure a new hire is a good fit and will stick around. Knowing the eligibility dates of your 401(k) and employer matching contributions is important, because they may reveal a significant gap in your savings plan.
If you have a long waiting period, you may want to consider contributing to an IRA or other savings vehicle in the interim to keep your retirement plan on track. Also, consider trying to negotiate a shorter waiting period with your new employer.
Find the right option for your old 401(k).
As you transition to your new job, you’ll want to decide what to do with your previous employer’s plan. You don’t have to do anything with your old 401(k). You can choose to just leave your funds in the account, but it could become difficult to manage your investments across multiple 401(k) plans.
Cashing out the fund is also a possibility, but there are several drawbacks to this option. You’ll have to pay taxes on the account value, and a large tax bill could significantly reduce your savings. You may also face an early distribution penalty if you’re under the age of 59½.
Another option is to roll your old 401(k) plan into an IRA. Generally, this option can be the most beneficial. One advantage of an IRA rollover is that it allows you to avoid the taxes and penalties. It may also offer a wider range of investment options than your previous plan. If you’re interested, a financial professional can provide further details and help you with this process.
Apprise your new plan administrator of year-to-date contributions.
Your yearly 401(k) contribution limit remains in effect even when you’ve contributed to more than one plan. For 2017 the maximum contribution allowed is $18,000 for those under age 50 and $24,000 for anyone age 50 or older.1
Contributions made to your old plan within the same year will count toward your limit. If you inadvertently exceed the contribution limit, you could face tax issues. Your new plan administrator is unlikely to be aware of your previous year-to-date contributions, so you’ll want to provide them with this information. That information will help them warn you before you reach your limit.
Ready to review your 401(k) options? Let’s start the conversation. Contact us at Sprouse Financial Group and speak with a financial professional today. We can help you analyze your needs and develop an ideal strategy.
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