As a mid-career professional in today’s workplace, accumulating multiple 401(k) plans is a real possibility. It’s very rare for someone to work for one company for the entirety of their career. Many of us have changed jobs for a variety of reasons and a by-product of those moves may be holding several retirement savings plans.
So, what do you do with all these different 401(k) plans? It’s important to understand your options, because a wrong decision could lead to a loss of savings.
Quick Definition of Terms
Despite always discussing these topics, it’s still good to have a refresher of the terminology. Most employers offer 401(k) plans, which finds them matching their employees’ pre-tax contributions.
There are two different types of 401(k) plans – Traditional and Roth IRA.
Traditional IRA: This retirement account allows individuals to direct pre-tax income toward investments that can grow tax-deferred. The IRS assesses no capital gains or dividend income taxes until the beneficiary makes a withdrawal.
Roth IRA: An individual retirement account that allows a person to set aside after-tax income up to a specified amount each year. Both earnings on the account and withdrawals after age 59½ are tax-free.
The advantage of a Roth 401(k) is evident with the absence of an income limit. Individuals with an adjusted gross income (AGI) of more than $153,000 and married couples filing jointly who make more than $228,000 are not eligible for a Roth IRA. This makes the Roth 401(k) a great option for people with high incomes.
Rolling Over into a Traditional IRA
A preferred choice for managing an old 401(k) plan is rolling it over to an Individual Retirement Account (IRA). An IRA gives you control over how to invest your savings.
Some of the benefits of rolling over the services to an IRA include:
- Chances of continued growth with deferred tax.
- You can withdraw the money, if you’re below age 59½, penalty-free for higher education or a first-time home purchase.
- Access to a wider range of investment choices.
However, there are some drawbacks to this option which include:
- Once you reach age 73, you must take annual RMDs (required minimum distribution) from a traditional IRA annually, even if you continue working.
- There is more federal law protection for 401(k) plans than in IRAs, although some states protect IRAs.
Where to Invest Your 401(k) Plan
It’s important to align any investment choices with your risk tolerance, time, and financial objectives. When considering where to invest your 401(k) plan or Traditional IRA, diversifying your portfolio is crucial to managing risk and optimizing returns. Consider a diverse portfolio in bonds, stocks, and alternative investments with good returns and managed volatility.
Fear of missing out (FOMO) can significantly hinder investment decisions. It's important to remember that investing is a long-term strategy, and chasing short-term market trends can often lead to poor outcomes. Instead, focus on your financial goals and consult a financial advisor (Hopefully you know a great one!) who can help you make informed investment decisions based on your unique circumstances and risk tolerance.
More importantly, don’t miss the chance to take advantage of this opportunity. Reach out today and let me help you take advantage of this option.
Taking a Holistic Approach
Considering your entire financial picture when managing your retirement savings is essential. A holistic approach involves looking at your debt, estate planning needs, insurance coverage, and other financial obligations. This approach ensures that your retirement savings align with your broader financial goals and enables you to make informed decisions that support your long-term financial well-being.
We could take your old, dormant 401(k) plans and roll them over to be an active member of your financial plan. There’s also an opportunity to make it easier on your heirs, if you take older 401(k) plans and combine them into one Traditional IRA. Once you open a Traditional IRA and pay the taxes, you may have the option of a Backdoor Roth IRA. All these opportunities are available to you once we start working on managing those old 401(k) plans.
Don’t overlook the importance of a comprehensive financial plan, and never assume it's only crucial to have a financial plan when you have significant assets. Creating a financial plan can help you set clear goals, develop an investing roadmap, identify potential risks, and help you achieve financial security.
Considerations for Married Couples
Married couples often face unique challenges when managing old 401k plans. It's crucial to have open and honest communication with your spouse about your retirement goals and aspirations. Together, you can develop a joint financial plan and determine the most effective way to handle your retirement accounts, whether it involves consolidating them or maintaining separate accounts.