Handling Retirement Savings During Job Changes

EP 139 - Handling Retirement Savings During Job Changes

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Navigating Retirement Accounts During Job Transitions

Have you recently changed jobs or planning a switch companies soon? Do you have money built up in a 401k or other retirement plan with your current employer? And you're not quite sure what you want to do with it when you leave? Well stay tuned, because today I will be sharing my best tips for handling retirement accounts during a job transition. I'm also going to share with you a nightmare scenario that I witnessed on the part of a client, which costs them thousands. In tax, you don't want to miss that story on today's show.

Welcome to Ask Ralph: Financial Wisdom from a Christian Perspective

Welcome to the Ask Ralph Podcast, where listening to an experienced financial professional with over 30 years of experience can help you make sense of confusing questions, current headlines, and industry trends about taxes, small business, financial decision making, investment strategies, and even the art of proper budgeting.

Ask Ralph makes the complex simple by sharing his real world knowledge from a Christian perspective with all things financial. Now here's your host, Ralph Estep, Jr.

Welcome [00:01:00] to our Saturday show. I'm so glad you chose to join us. I want to thank you for listening and more importantly, supporting the program. I'm coming to you from the Estep Farm at the Saggio Accounting studio . today. Let me put on my podcaster hat. Put down those overalls and slide that adding machine to the side and let's get into some financial wisdom from a Christian perspective.

Understanding Your Retirement Account Options

Today we're talking about what to do with your retirement accounts when you change jobs, Listen folks, this is sometimes an inevitability. It seems these days we do change jobs quite a bit, well don't forget to subscribe to the show and join our email list. You do that at askralphpodcast.com . So you don't miss tomorrow show for our spiritual Sunday. We're going to be discussing weathering the storms of life. This will be a truly inspirational discussion about the realities of life and how to thrive during the storms of life. It seems like we're always going through storms and tomorrow I'm going to give you some concrete ways of how to get through those unscathed or at least partially unscathed. We also launched an insider's group on [00:02:00] Facebook and I encourage each of our listeners to join the group to continue the conversation from the show. It's a great place to share ideas for the show, discuss your triumphs and your challenges. I'll have a link to the Facebook group in the show notes.

Let's start with today's Bible verse. The Bible reminds us in Proverbs chapter 21, verse 20 precious treasure and oil are in a wise man's dwelling, but a foolish man devours it. When we change jobs, it can be tempting to cash out of our retirement savings. Instead of protecting them for the future. Trust me, I see this every day. But as wide stewards, we should handle these accounts responsibly. Even during transitions. Whether you recently switched companies are considering a new opportunity or just want to better understand your options. This discussion will provide some practical advice. I'll share the mistakes to avoid, and the smartest moves to make and real life examples from my own career changes.

My goal was pretty simple. It's to equip you with [00:03:00] knowledge so you can make informed decisions and continue building wealth for your future retirement. As I always say, information and knowledge is power first,

let's do a quick overview of the most common employer sponsored retirement accounts. Those are your 401ks, your 403B's and pensions. The details can get complicated, but essentially 401ks are offered by private for-profit companies. 403B's are offered through nonprofit organizations and pensions guarantee set payments in retirement. The money you contribute to these accounts is invested and generally grows tax deferred, meaning you don't pay taxes on it until retirement. Many employers also match a percentage of your contributions up to a certain amount. We generally call these accounts pre-tax money investments since they help to reduce your taxable income at the time of the contributions.

Exploring the Four Main Options for Your Retirement Account

But then it leaves the question, Ralph, what happens when I leave my job, you really have four main options. We're going to [00:04:00] handle those right now.

Your first option is cash out and take a taxable distribution. The second option is leave the money in your former employers plan. Third option is rollover the account to your new employer's plan or fourthly you can roll over the bounce into an IRA. So let's explore the pros and cons of each one of these choices there really are four to. Choose from.

Let's start with the cash out. This is often the most tempting, but usually not the best. I would even say it's probably the worst option. If you withdraw the money and don't roll it over, you're going to face penalties and immediately income tax on the entire distribution. For people younger than 59 and a half, you'll also pay a 10% early withdrawal penalty. So you're going to pay that 10% on whatever the full amount is that you take out of that plan By cashing out you shrink your retirement savings significantly. That's what I call the 45% haircut. Cause you will effectively we lose 45% of your retirement savings in tax and folks. It takes a long time to recover from that. However, there are [00:05:00] some rare situations where this move makes sense, like using the funds during unemployment to avoid high interest debt or paying necessary bills. And you know, sometimes you have to do what you have to do, but you've got to proceed with extreme caution and consult a financial advisor. First. This is where you want to spend some money. My friends. And speak to a professional before you make any moves. The story I'm going to tell you at the end, we'll highlight that completely.

Your next option is leave the money in the old plan. You might choose to keep your savings in the former employers, 401k, or there 403B plan. If you like the investment options, or you want to delay moving the money, some plans allow you to do this so long as your balance is over $50,000, but you're going to have to look and see. Does this particular plan allow you to do that? The big drawback here is you won't be able to contribute more to that account since you no longer work there. And over time you can lose track of old plans and accumulate fees, which eat away at your balance. I have seen it more than once where a person will forget completely about that old 401k [00:06:00] plan. They have, maybe they didn't have a ton in it. And then all of a sudden, they say to me, Ralph, you know, I think I have this plan with this other employer. And they find that they've been eaten a lot with fees, and then they got to do all these. Transfer. So you want to pay attention to that?

Another option is to roll into a new employer plan. If your new job offers a retirement plan, like a 401k, you can roll over your old balance into that account. It's pretty cool. You can mix it together. This consolidates your savings into one place and allows you to keep growing tax deferred savings. You just need to make sure to directly transfer the money. You don't want to make a mistake here because if not, you may end up paying taxes and penalties. The downside to this is if you leave this employer too you'll don't have to make another rollover decision in the future. But again, I think this is a better decision than the first two.

And the final option roll into an IRA. This is often the best approach moving the old 401k or 403B into a traditional IRA account allows you to consolidate savings. While maintaining flexibility [00:07:00] and ultimately maintaining control. You have a wider array of investment options and likely lower fees because it's your IRA you can really choose to do with it. What you will. You just need to make sure you initiate a direct rollover to avoid any penalties. The only caveat is this required minimum distributions kick in at age 73 with IRAs, but not until retirement with employer sponsored plans. So this is something to consider, but not a huge drawback unless you plan to work for the new employer until you're over 72. But I don't know too many people that continue working at that age.

So in summary direct, rolling over your balance into an IRA is ideal. For most people changing jobs. It keeps your retirement savings growing tax deferred and gives you more investment flexibility.

Personal Insights and Advice on Retirement Account Rollovers

Let me share some personal examples of handling rollovers in my own career. I remember when I left my first job out of college in an accounting firm. I had about $10,000 in my 401k. At that point, I opted to cash out. [00:08:00] Probably wasn't the best decision. And it costs me about a half of it in tax. I could have done other things, but, you know, I was just starting out. I used the money to pay off some student loan debt and some other things, but it really wasn't the best financial and certainly wasn't the best tax decision. Later when I changed roles and went to a tech company, I did a direct rollover into an IRA this time. At that point, my balance was over $20,000. So I took that money and I rolled it into an IRA, more investment choices and lower fees made the IRA a better fit, and I didn't lose a bunch. In tax. However, when I took a new job at a nonprofit organization, that's when I went to work for a credit union. I chose to roll my IRA back in to their 403b plan. So I could take advantage of their employer match program and simplify my savings. And that worked up until I started my own practice. And now I just have a IRA account that I fund on my own. So as you can see, there are several smart ways to handle retirement accounts. When your career [00:09:00] moves in a new direction. Just don't make the mistake. I did and cash it out unless you absolutely have to, you know, if you're going through a job downtime or you don't have a job or you've got something hanging over your head, you got to take care of. Sometimes you just gotta do what you gotta do, but ultimately it's not the best choice. The key is avoiding taxes and penalties while keeping your money working for you. Give yourself time to evaluate the best options instead of rushing in the withdrawals. You'll regret later. And don't hesitate to consult financial and tax experts. When you need guidance.

Action Steps for Managing Retirement Accounts Amidst Career Changes

So if you're changing jobs soon, here's some action steps as you navigate this transition. The first thing you want to do is find out the amount in your current retirement accounts and your investment choices offered. You'll find out whether they'll allow you to keep the money there, or if you have to take it out, this will help determine the best rollover option. Once you've done that research, the new employee's retirement plan options. If they have one, see if rolling into their 401k or 403b makes sense. See if it's something they even allow. [00:10:00]

The next thing you want to do is consider opening an IRA with an institution like your credit union. Maybe use your current investment advisor or companies like Vanguard fidelity, or Charles Schwab for a potential rollover. And I've gotta be honest with you, the names of these change sometimes. So if you're listening to this and one of those is no longer in business, I apologize ahead of time. The key to this is to compare the fees and the investment selections and make sure there's something that you want. And here's the key folks. Consult with financial and tax advisors to understand your specific situation, avoid penalties and minimize tax impact. It's always wise to consult with a professional because you don't want to make a mistake.

The next thing you want to do, if you decide to move that money is initiate to direct rollover, once you decide on your approach. So once you decide what you're going to do, whether it's moving into the new employer, or if it's cashing it out, or if it's moving it into your own IRA, you do want to make sure you file all your paperwork with your former plans administrator and stay on top of [00:11:00] that. And like I said, don't cash out money you'll need for retirement. If you do that, you lose your savings. So protect your savings and keep it invested for the future. There are time deadlines you need to meet. So make sure you stay on top of this. Remember. Just because you're starting a new job doesn't mean you have to abandon retirement funds. You worked hard to build. You don't have to start over with your retirement just because you're moving into a new job with smart planning. During a transition, you can maintain your savings. Momentum.

A Cautionary Tale: The Importance of Wise Financial Decisions

Now, let me share that story. I promised earlier. A few years ago, I had a new client come in for a consultation and some tax advice. They actually wanted me to prepare their tax returns. They had decided to cash out their retirement account to pay off their home. As soon as I heard that, I was like, oh boy, this is going to be ugly. They told me that their financial advisor has suggested this plan. So they will not have a mortgage, but what an unmitigated tax disaster. Since this increased their income to well over $400,000 in the [00:12:00] year, they ended up losing nearly 40% of their retirement money. And when I prepared their taxes, they had to take a home equity loan just to pay the federal state taxes triggered from this bone headed idea from their broker. It was terribly emotional and the clients just sat before me sobbing. With the realization that not only did they owe over $150,000 in tax. They had to take a mortgage to pay it. So now the whole plan of not having a mortgage was completely dashed. This just goes to show you that you have to really research your decisions and always, always. Always. Look into the people you're asking for, for advice, make sure they know what they're talking about. And make sure they have your best interest in mind.

I know that was a rough story, but I hope this overview equips you to make wise decisions with the retirement accounts. When changing jobs, I encourage you to visit askralphpodcast.com for more financial wisdom [00:13:00] and be sure to share this episode.

And I want to ask for a special favor today. I want you to picture someone who is really struggling financially. And I want you to make a point of sharing today's episode with them and the show in general. my goal here is very simple. I want to help people achieve financial prosperity and provide for themselves and their family. We are living in tough financial times and we all need to find resources to help us. So please share this show with others and let's grow the audience and reach more people with a positive message of financial prosperity from a Christian perspective.

Closing Thoughts and Prayer for Financial Stewardship

I don't usually do this on Saturdays, but I felt compelled to close this in prayer. Lord guide us to be why stewards? of the resources you've given us, help us make prudent decisions with our finances during seasons of transition. Give us clarity on how best to protect and grow the retirement funds. We've accumulated over the years. remind us that you are Jehovah Gira our [00:14:00] provider. So that money does not become an idol. We trust in more than you. Thank you for being a faithful, loving God. We give you all the praise and the glory. Amen.

Well, that wraps up for today. My friends, I hope you feel empowered to navigate those retirement accounts wisely. When you change jobs, you don't have to start over. So as I always say, stay financially savvy and may God bless you and enjoy your Saturday. My friends.

Thank you for joining us on the AskRalph podcast. And with a simple click to subscribe, we'll invite you back to our next episode. And remember, financial issues don't have to be complicated. Just AskRalph. The information contained in this episode of AskRalph is based on data available as of the date of its release.

Saggio Accounting Plus and AskRalph Media Inc. is under no obligation to update this content if changes occur. Applying this information to your specific situation requires careful consideration of all facts and circumstances, and any information provided is not to be [00:15:00] considered as financial, tax, or legal advice.

Please consult your tax advisor or attorney before acting on any material covered.