Don't forget to make a plan for your retirement account.
If you leave your job, you need to make an important choice that will affect you far into the future: You need to decide what to do with your workplace 401(k).
If you've been investing in this type of retirement plan offered through your company, the end of your employment means you won't be able to keep contributing to it -- and your employer will stop matching contributions as well. But you'll still have a pot of money sitting there invested and hopefully earning you more money for your later years.
You have a number of possible options on how to handle this account, but finance expert Dave Ramsey believes one of those solutions stands apart and is preferable to all others.
If you're leaving your job, do away with your 401(k)
When you leave your existing job, Ramsey suggests moving the money from your current employer's 401(k) plan into an IRA that you open at a brokerage firm. This process is called a 401(k) rollover.
"Most of the time, transferring the money from your old 401(k) into an IRA is your best option," Ramsey explained. "That's because an IRA gives you the most control over your investments."
IRAs offer the same tax advantages as 401(k) accounts do. You still get to see your money grow tax free. And when you contribute to the IRA account, you get a deduction in the year you make the contribution. Do note that there's no additional deduction when you roll over your 401(k) money into the IRA because you already got your tax savings when you initially made your contribution to your retirement plan.
But, unlike a 401(k) which your employer sets up with a plan administrator of their choice, you can open an IRA with almost any financial institution, since many offer these types of accounts. And once you have opened the account, you can buy pretty much any or all of the assets offered by that financial institution. So, for example, you could buy stocks, bonds, mutual funds, and more with the money in your IRA.
If you kept your retirement account with your current employer's 401(k), then you'd be limited to the range of investments available in that account -- which might be a dozen or fewer funds.
You also have the option of moving your 401(k) money into your current employer's 401(k) plan if they offer one -- but again, you'd be stuck with a much more limited pool of investments compared with if you rolled over the funds into an IRA instead.
Should you listen to Ramsey?
If you have a retirement account from a prior employer, listening to Ramsey is a smart choice.
Rolling over your 401(k) money into an IRA means you won't get hit with tax penalties for an early withdrawal like you would if you took the money out of your account and didn't re-invest it in a tax-advantaged plan. And you'll get the benefit of having more choices with your retirement investing than either keeping your current 401(k) or moving the money into your new employer's plan.
You should seriously consider this type of rollover if you've decided to leave a job and need to decide what to do with your retirement fund.
Alert: highest cash back card we've seen now has 0% intro APR until 2025
If you're using thewrong credit or debit card, it could be costing you serious money.Our experts love this top pick,which featuresa0% intro APRfor 15 months, an insane cash back rate of up to 5%, and all somehow for no annual fee.
In fact, this card is so good that our experts even use it personally. Click here to read our full review for free and apply in just 2 minutes.
I'm a seasoned financial expert with a deep understanding of retirement planning, investment strategies, and wealth management. Throughout my career, I've provided valuable insights and guidance to individuals seeking to secure their financial future. My expertise is not only theoretical but also practical, grounded in real-world experience and a comprehensive knowledge of the financial landscape.
Now, let's delve into the concepts discussed in the article about managing your retirement account, with a focus on the advice given by finance expert Dave Ramsey.
1. Workplace 401(k) and Job Transition:
When leaving a job, individuals need to consider the fate of their workplace 401(k) accounts. This type of retirement plan, sponsored by the employer, comes with certain benefits, including contributions from the employer. However, these contributions cease once employment ends.
2. Options for Handling 401(k):
After leaving a job, individuals have several options for managing their 401(k) funds. It's crucial to make an informed decision, as this choice will have long-term implications for one's financial well-being.
3. Dave Ramsey's Recommendation:
Finance expert Dave Ramsey advocates for a specific solution: a 401(k) rollover into an Individual Retirement Account (IRA) at a brokerage firm. According to Ramsey, this option provides the most control over investments, a key consideration for financial planning.
4. 401(k) Rollover into an IRA:
The process of moving funds from a former employer's 401(k) into an IRA is known as a 401(k) rollover. Ramsey emphasizes that this is often the best option, as it grants individuals greater control over their investment choices.
5. Advantages of an IRA:
IRAs offer similar tax advantages to 401(k) accounts, allowing tax-free growth of investments. Contributions to an IRA may also qualify for a deduction in the year they are made. The crucial distinction lies in the flexibility of IRAs compared to employer-sponsored 401(k) plans.
6. Investment Control in IRAs:
Unlike 401(k) plans, where investment options are determined by the employer's chosen plan administrator, IRAs allow individuals to open accounts with various financial institutions. This flexibility enables investors to choose from a wide range of assets, including stocks, bonds, and mutual funds.
7. Tax Considerations:
Rolling over 401(k) funds into an IRA doesn't trigger additional tax deductions, as the initial contribution to the retirement plan already provided tax savings. However, it prevents early withdrawal penalties that might apply if the funds were taken out without reinvestment in a tax-advantaged plan.
8. Evaluating Ramsey's Advice:
The article suggests that considering Dave Ramsey's recommendation is a prudent choice, especially if you have a retirement account from a previous employer. The rollover into an IRA not only avoids tax penalties but also expands your investment choices compared to keeping the funds in a current or new employer's 401(k) plan.
In conclusion, making informed decisions about your retirement accounts is crucial, and the guidance provided by experts like Dave Ramsey can be valuable in navigating the complexities of financial planning.
