Whether you’re starting a completely new career or being promoted into a new role within the same company you’ve been with for years, a new job often comes with a new set of financial opportunities. These three-part Congrats on the New Job! series will cover important factors to consider when evaluating your employer’s retirement savings options, insurance plans, and other benefits beyond just your take-home salary.
The Defined Contribution Plan
Many employees make the mistake of assuming that the ‘default’ enrollment for their employer’s 401(k) is their only option. Here are some factors to consider and questions to ask when evaluating your employer’s defined contribution plan:
How much of your contribution will your employer match, and how much should you contribute?
- Try to contribute at least up to the maximum of your company’s match, and then take other factors into account when determining whether or not you want to go over that match. Many small companies have 401(k) plans with high fees, so it may not be worth it to contribute to the plan above the matching percentage, since you may find that what you save in taxes you just pay again in fees.
- Don’t forget about your bonus! If you’ve received a sign-on bonus from your new employer, ask about whether or not this is also eligible for deposit in your 401(k), as well as an employer match. This is a great opportunity to save on the taxes that would typically take a significant chunk out of your bonus and make even more out of your bonus by taking advantage of your employer’s matching policy.
Can you select your own investments, and if so, what are your options for diversification?
- Your plan may allow you to choose from a variety of investments, such as stocks, bonds, mutual funds, and guaranteed investment contracts. If your plan has a self-directed, full brokerage option (most don’t), you’ll have access to a brokerage account in which you could include individual stocks, bonds, ETFs, and other options outside the typical mutual funds that are offered. Larger companies are more likely to have this option.
- Ask who the fund managers are, how they have performed in the past, and then consult with a financial professional. Deciding on a strategy that diversifies your portfolio and aligns with your priorities can be complicated, and a financial services professional can help you make the most of this opportunity.
- If you aren’t happy with the investment options offered by your employer, look into options for a partial rollover, in which you may be able to transfer a percentage of your plan into another retirement account.
How often can you change your investments to keep up with your current needs?
- Many people invest more aggressively when they are younger and have the time to recover from losses. As people approach retirement, they may make more conservative investments, as there is typically less time to recover from any losses. While most plans let you make changes at will, some restrict changes to only once per month or per quarter. It’s important to find out how you will be able to change your allocations over time, and discuss with your financial professional how to make this schedule work with your financial plan and retirement goals.
- You also may want to check on how often you can change the amount you’re contributing to your 401(k). As you enter your fifties, you can take advantage of catch-up provisions, which allow older retirement savers to contribute more than the standard IRS limit to their retirement account.
If you had a 401(k) at a previous job, what are your options for those funds?
- Leaving the money where it is, in your previous employer’s 401(k)
- Leaving your money in your old employer's 401(k) plan may be a good idea if you’re happy with the investments offered or you need time to explore options. You also may want to temporarily leave these funds where they are if your new employer requires employees to work for a certain amount of time before participating in their 401(k).
- You may not necessarily have the opportunity, however, to leave these funds in your old plan. Your employer can require you to remove your money from your plan when you leave the organization if your vested 401(k) balance is $5,000 or less.
- Rolling these funds into an IRA or your new employer’s 401(k)
- Just as you can withdraw funds from your 401(k) when you leave a job, you can also roll them over into an IRA or your new employer’s 401(k), if the plan allows for it. There is no dollar limit on how much of your 401(k) you can transfer to an IRA.
- To diversify, you can also convert your non-Roth 401(k) money to a Roth IRA, but the taxable portion of your distribution will be included in your income at the time of the rollover. If you’ve made Roth contributions to your 401(k), those can only be rolled over into another Roth 401(k), Roth 403(b), or Roth IRA.
- Generally, a direct rollover is the most seamless way to rollover funds. In this arrangement, your 401(k) plan directly transfers funds to an IRA you’ve established or your new employer’s 401(k) plan. Directly transferring these assets from one trustee to another keeps your savings tax-deferred, since the funds never pass through your hands. If you directly rollover your funds, no federal income tax will be withheld.
What’s the best option? The IRA or the new 401(k)?
- Each savings approach has advantages and disadvantages, and your individual situation will determine which of these is a better fit for you. Here are some points to consider:
- A 401(k) plan may allow penalty-free withdrawals if you leave your job at age 55 or later. Typically, penalty-free withdrawals are not available from IRAs until age 59 ½. In addition, you must take the required minimum distributions from a traditional IRA when you reach the age of 72. Typically, you don’t need to take required distributions from 401(k) plans until you retire.
- While a 401(k) plan limits you to the investment options offered by the plan, an IRA offers almost unlimited investment options.
- Depending on plan rules, a 401(k) may allow you to borrow against the value of your account.
- Make sure you understand what each plan provides. Both IRAs and 401(k) plans can have account fees or investment-related expenses. They also may provide services such as retirement planning education and investment advice. Your employer’s particular 401(k) may reduce the taxes on employer stock if distributed from a 401(k) plan rather than an IRA. These costs and benefits vary from plan to plan, however, and careful research will help you determine which option is a better fit for you.
Before deciding what to do with the funds in your 401(k), you may want to discuss your particular situation with a tax professional (as well as your plan administrator). Jackson's educational resources can provide resources for working with a financial professional to make decisions that honor your future financial well-being.