If you have contributed to your former employer’s 401(k) Plan, you understand the importance of saving and the benefits of this type of investment. Now that you’ve left your former employer and can no longer make tax-deferred contributions, you have an opportunity to address what you’d like to do with this retirement account, as well as review your entire retirement strategy. While continuing to save is generally the best strategy, there are several options to consider regarding how and for how long you save.
Understanding Your 401(k) Options
Once you leave your employer, you have four main choices when determining what to do with your 401(k):
- Leave Your Money in Your Old Employer’s Plan
You don’t have to take any action right away. You can leave your money in your old employer’s 401(k) plan and put off making any immediate decisions. This option might appeal to those who do not want to lose the current mix of investments in their account. However, keep in mind that your investment options may be limited, and you cannot make any additional contributions to the plan. If your account balance is $5,000 or less, your former employer may roll over your account into an IRA. - Move Your Money to a New Employer’s Plan
You may have the option to transfer the funds directly into your new employer’s 401(k) plan. The investment options in the new plan may differ from your old plan, so it’s important to review how your money was invested in your previous plan before making any decisions. This also provides an opportunity to choose a mix of investments that aligns more closely with your current goals. - Receive a Distribution
Another option is to take a distribution from your old employer’s 401(k) plan. You’ll receive a check, but it will be subject to 20% federal income tax withholding. If you withdraw funds before age 59½, you’ll typically face an additional 10% penalty, unless you are 55 or older when leaving the company. Additionally, receiving a distribution could push you into a higher tax bracket for the year. Taking the money now may seem appealing, but keep in mind that you’ll have less money saved for retirement in the future. - Roll Your Money Over into an IRA
A Rollover IRA allows you to defer taxation on distributions until you begin withdrawing funds. The tax deferral is a significant advantage, as it allows the entire rollover amount to grow tax-deferred. When you do begin to withdraw funds from the IRA, they are taxed at your ordinary income tax rate. A Rollover IRA often provides more investment flexibility than an employer’s 401(k) plan, offering more options to customize your retirement strategy.
Important Disclaimers:
Articles published are for general informational purposes only and are not intended as an offer or solicitation to buy or sell any securities or commodities. Any particular investment should be analyzed based on its terms and risks in relation to your specific circumstances and objectives.
Morgan Stanley does not provide tax or tax-accounting advice. This material was not written to be used for the purpose of avoiding penalties imposed under U.S. federal tax laws. Clients should consult with their tax and legal advisors before engaging in any transactions involving IRAs or other tax-advantaged investments.
Investments and services are offered through Morgan Stanley & Co. Incorporated, member SIPC.
Contact Information:
Mario U. Smith
Financial Advisor
Morgan Stanley Global Wealth Management
1920 E. Route 66
Glendora, CA 91740
Phone: (626) 914-7313
Main: (626) 914-7300
