401(k) Spend It or Save It Calculator Online

What to do with your retirement savings

Making a change in career or employment is a big one. There is a lot to consider at the end of one chapter and the beginning of another. Before moving on, you have to collect your belongings and figure out what to with your workplace savings. When you have a 401k account, there are a few options of what you can do next. It is worth exploring your options, as the wrong move could cost you many thousands of dollars.

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Leaving your employer
In this economy, people are switching jobs more frequently than ever. The average person will seek new employment several times during their career. With most only spending about five years with each employer. These work transitions can consist of many perks like pay increases, health insurance, and retirement programs. Other times, a new job can be a catapult into unchartered territory.
Regardless of the circumstances, you’ll face a critical decision: What do you do with the savings in your 401k? Here you can find relevant resources to help you navigate through this tough financial decision.
Your 401k account
401k is a retirement savings plan that is offered by many employers. The program boasts a multitude of benefits, beginning with pre-tax contributions. Your contributions grow according to some investments selected by your plan administrator. Then you benefit from compound interest, and aren’t taxed until you are ready to make a withdrawal. These are just the basics of the plan though. To learn more about the considerations, plus what your account could be worth, click here.
The value of your 401k will vary based on your time in the workforce, and your regular deposits. For example, someone that makes 80,000 per year might contribute 10% of their income for the first five years of their career. If the annual rate of return on the account were 7%, then that individual would already have $40,000 saved. Say their employer offered some amount of profit matching, that value could rise even higher.
Spending your 401k
Whether you are new or seasoned in the workforce, you probably want to make the most of your earnings. Cashing out your savings is rarely recommended if you are under 55 years old. A substantial portion of your funds would go towards taxes and penalties, which could eat away at your profit.
For instance, let’s say you saved up $250,000 in your 401k by the age of 45. If you decided to take out your money, you would owe $100,000 in taxes and penalties. Thus, you would only have $150,000 remaining. If you had continued saving for another 20 years, you could’ve made an extra $717,421 in interest.
As you can see, there is a big difference in outcomes, which can really affect your quality of life. Since pensions are not readily available, most people will have to rely on their assets upon retirement. Social security will provide some benefit, but was never intended to be a primary source of income.
As it stands, someone that made an annual income of $100,000 for an average of 35 years would only receive about $2,150 per month from social security. That same person was making around $5,600 per month before retiring. Thus, living on social security alone would be a challenge.
Best 401k moves when you leave a job
Many strategies are more beneficial then cashing out. You could maintain the funds in their current program or transfer the account to your new employer. Alternatively, you could roll over into an Individual Retirement Account.
Keeping the 401k as is
One option is to leave your money where it is. Most plan administrators will allow you to keep your savings in their program for a fee. Typically, the cost can be two to three percent of the account balance per year. That means if your investments provide a 6% return that could fall to a mere 3 to 4% after service charges. Since the fees will reduce your total ROI, this should only be considered as a temporary solution.
Remember, future investment options will be limited, and you will have to keep tabs on the company. There is no guarantee that this employer will be around forever. It could be a hassle to track down your money if many decades have passed. However, if you are retiring soon and believe things will stay relatively the same until then, this could be worthwhile.
Taking the 401k with you
It’s typically better to move the account to your new employer versus leaving it with the previous one. You will be provided with fresh investments, full returns, and can enjoy the ease of automatic deposits. If your employer offers matching contributions there is a lot more you could gain from the arrangement. Plus, it’s much easier to keep track of your savings.
Rolling over to an IRA
In most cases, transferring to an IRA is the best option for your 401k savings. You’ll experience friendlier fees and a greater variety of investment options. There is also more flexibility in taking withdrawals from an IRA than a 401k.
With an IRA, you can make a penalty-free withdrawal when purchasing your first home. The penalty-free allowance also extends to paying for post-secondary education and health insurance when unemployed. It can be intimidating, but you don’t have to be a skilled investor to have a successful IRA. With just a little effort, you can have an excellent handle on your nest egg.
Considerations for IRA holders
There are some situations where deciding the fate of your 401k savings is more complicated.
If you want to transfer your 401k to an employer in the future, don’t combine your workplace savings with existing IRAs. You can’t transfer that portion of the money out again afterwards. Instead, open a new IRA with an affordable brokerage that offers low-cost index funds. This will allow you to keep your options open.
You should also avoid a rollover of your 401k savings into an IRA if you want to convert any of your savings to Roth. For more info on how Roth conversions work, click here. In short, some proceeds may get double-taxed when a company plan gets merged with post-tax funds that have taxable earnings.
Using the calculator
The calculator is very easy to use. It is designed to show you the taxes and penalties you might pay if you wanted to withdraw your retirement savings. You just have to add a few details about your existing 401k. Let’s review the details together.
First, you will have to summarize your retirement account, beginning with your current balance and rate of return. Then, you can add your age and the age you intend to retire. The final step is to document your federal and state income tax rates. Once the questionnaire is completed, you can check out various reports regarding your 401k.
There is a tab highlighting the value of your savings if you cash out now in green, versus continuing to save in blue. A more detailed breakdown of the taxes, penalties, and lost interest can be found in the next report. You can also see the advantages and disadvantages to both saving and spending in the last two tabs.
Remember to bookmark this page and save it to the home screen of your smartphone. You can return as your finances or employment change. If you found this page useful, you can promote us on social media by using the share feature. If you want to save your results, just export a PDF report to your email.