The 401(k) Survival Guide

You work inside the United States for an employer…odds are you have a 401(k) plan. This is a type of account that is designed to help employees save and invest a portion of their income for retirement on a tax-deferred basis. That’s a “tax benefit” because the employees don’t owe federal income tax on the money they save in their traditional 401(k).

Before we go any further, there are a number of important rules & regulations that control surrounding 401(k) plans. And the IRS has an amazing Resource Guide for participants AND businesses on their website. I’ll cover a few of the most common guidelines below.

Leaving Your Employer

Laid off. Terminated. Taking a sabbatical. Or, getting a new job. Regardless of your situation, the long-story short is that you get to keep, move, or cash out your 401(k) account.

First, you can leave your 401(k) -typically- with your old employer & the company they use to manage the plan. Alternatively, you could move -rollover- your 401(k) into an IRA account with the investment company your employer uses.

Second, you can take your 401(k) with you to your new employer. This rollover can help you keep your 401(k) accounts consolidated into one. If your employer doesn’t offer a plan or you’d like more control over the funds, you can rollover to an IRA at an investment firm of your choosing.

Last but not least, you do have the option to “cash out” your 401(k). This is an option that should rarely be taken. If done wrong, a number of taxes & penalties will be taken & owed. This can be a huge loss to your accumulated wealth…but it often becomes a major financial setback for people who try to use their 401(k) to “get ahead” on bills, cash spending, or other short-term goals.

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Optimizing Your Accounts

Some 401(k) plans (and other similar plans) allow something called an in-service rollover. This allows you to move funds from your employer-sponsored retirement plan to an IRA (individual retirement agreement account) of your own. This may help you expand your investment options & reduce your investment expenses.

If your plan does not allow in-service rollovers, your next step is to evaluate the investment options available & their costs. Target date funds, index funds, the lot. Some providers, like Fidelity who offers a program called BrokerageLink, offer participants the ability to expand their investment options, potentially reduce costs, & take greater control of their employer-sponsored retirement plan.

Final Thoughts

While rollovers & controlling costs can be impactful, one of the most important ways for you to control what happens in your 401(k) & to maximize your savings is to understand the terms & conditions. Do you benefit from contributing more than the “match”? Are you planning an early retirement where qualified withdrawals, 72t withdrawals, & plan loans could be useful tools? Are tax-deductible & deferred contributions going to save your dollars today & in the future?

Figuring out how to balance the pros, cons, benefits, & planning opportunities of your 401(k) or similar retirement can be tricky. Take your time, do the math, & don’t be afraid to consult with a qualified financial planner, CFP, or advisor.