When Can I Retire This Formula Will Help You Know_780x440

When Can I Retire Calculator

When it comes to figuring out when you can retire, there are a number of factors to consider: Social Security, inflation, and health care costs.

Thankfully, there’s retirement calculators for figuring out these costs, which might help you plan for the future. But first, to decide when you can retire, determine at what age you want to retire and then see how that decision affects your finances.

Key Points

•   Factors to consider when deciding when to retire include Social Security benefits, inflation, and healthcare costs.

•   The full retirement age for Social Security benefits varies based on birth year.

•   Early retirement can result in reduced Social Security benefits, while delaying retirement can increase monthly benefits.

•   Different retirement accounts have specific rules for withdrawals, such as Roth IRAs and traditional IRAs.

•   Other sources of retirement income to consider include part-time work, pensions, inheritance, and rental income.

When Can You Get Full Social Security Benefits?

As you consider when to apply for Social Security, you’ll want to understand at what age the government allows people to retire with full Social Security benefits. Not only that, at what age can people start withdrawing from their retirement accounts without facing penalties? For Social Security, the rules are based on your birth year.

The Social Security Administration has a retirement age calculator . For example, people born between 1943 and 1954 could retire with full Social Security benefits at age 66.

Meanwhile, those born in 1955 could retire at age 66 and two months, and those born in 1956 could retire at age 66 and four months. Those born in or after 1960 can retire at age 67 to receive full benefits. This can help with your retirement planning.

Social Security Early Retirement

A recipient will be penalized if they retire before full retirement age. The earlier a person retires, the less they’ll receive in Social Security.

Let’s use Jane Doe as an example and say she was born in 1960, so full retirement age is 67. If she retires at age 66, she’ll receive 93.3% of Social Security benefits; age 65 will get Jane 86.7%. If she retires on her 62nd birthday — the earliest she can receive Social Security — she’ll only receive 70% of earnings.

Here’s a retirement planner table for those born in 1960, which shows how one’s benefits will be reduced with early retirement.

How Early Retirement Affects Your Social Security Benefits

Source: Social Security Administration

Social Security Late Retirement

If a person wants to keep working until after full retirement age, they could earn greater monthly benefits. This is helpful to know when choosing your retirement date.

For example, if the magic retirement number is 66 years but retirement is pushed back to 66 and one month, then Social Security benefits rise to 100.7% per month. So if your monthly benefit was supposed to be $1,000, but you wait until 66 years and one month, then your monthly allotment would increase to $1,007.

If retirement is pushed back to age 70, earnings go up to 132% of monthly benefits. But no need to calculate further: Social Security benefits stop increasing once a person reaches age 70. Here is a SSA table on delayed retirement .

💡 Quick Tip: You can’t just sit on the money you save in an IRA account forever. The government requires withdrawals each year, starting at age 73 (for those born in 1950 or later). These are called required minimum distributions or RMDs.

Boost your retirement contributions with a 1% match.

SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.


Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

Other Retirement Income to Consider

In retirement, you may have other income sources that can help you support your lifestyle and pay the bills. These might include:

Part-Time Work

Working after retirement by getting a part-time job, especially if it’s one you enjoy, could help cover your retirement expenses. And as long as you have reached your full retirement age (which is based on your year of birth, as noted above), your Social Security benefits will not be reduced, no matter what your earnings are.

However, if you retire early, you need to earn under an annual limit, which is $21,240 in 2023, to keep your full benefits. If you earn more than that, you’ll lose $1 in Social Security benefits for every $2 you earn over the limit.

Pension

A pension, also sometimes known as a defined benefits plan, from your employer is usually based on how long you worked at your company, how much you earned, and when you stopped working. You’ll need to be fully vested, which typically means working at the company for five years, to collect the entire pension. Check with the HR rep at your company to get the full details about your pension.

A pension generally gives you a set monthly sum for life or a lump sum payment when you retire.

Inheritance

If you inherit money from a relative, these funds could also help you pay for your retirement. And fortunately, receiving an inheritance won’t affect your Social Security benefits, because Social Security is based on money you earn.

Rental Income

Another potential money-earning idea: You could rent out a home you own, or rent out just the upper floors of the house you live in, for some extra income in retirement. Like an inheritance, rental income will not affect your social security benefits.

Major Expenses in Retirement

It’s important to draw up a budget for retirement to help determine how much money you might need. The amount may be higher than you realize. These are some of the major expenses retirees commonly face.

Healthcare

For most people, healthcare costs increase as they get older, as medical problems can become more serious or pervasive. According to Fidelity, the average amount that a couple who are both age 65 will spend on healthcare during their first year of retirement is $12,300.

Housing

Your mortgage, home insurance, and the costs of maintaining your house can be a significant monthly and yearly expense. In fact, Americans aged 65 and older spent $16,880 annually on housing during the years from 2016 to 2020, according to the Bureau of Labor Statistics.

Travel

If you’re planning to take trips in retirement, or even just drive to visit family, transportation costs can quickly add up. From 2016 to 2020, people over age 65 averaged about $7,062 in transportation costs a year.

When Can You Withdraw From Retirement Accounts?

Now let’s look at retirement accounts. Each type of account has different rules about when money can be taken out.

If a Roth IRA account has existed for at least five years, withdrawals from the account are usually okay after age 59 ½ without consequences. Taking out money earlier or withdrawing money from a Roth IRA that’s been open for fewer than five years could result in paying penalties and/or taxes.

There is a little wiggle room. Retirement withdrawal rules do have exceptions for issues like disability or educational expenses, and there is an option to withdraw money early and pay taxes or penalties.

If a person is at least 59 ½ and has a Roth IRA that is less than five years old, taxes will need to be paid upon withdrawal but not penalties. Taxes or penalties might not need to be paid at age 59 ½ and if the Roth IRA has been open for five years or more.

People with a traditional IRA can make withdrawals from ages 59 ½ to 72 without being penalized. The government will charge a 10% penalty on withdrawals before age 59.5, and depending on location, a state penalty tax might also be charged.

People with 401(k)s can typically retire by age 55 and make withdrawals without receiving a penalty. People with either a traditional IRA or 401(k) must start making withdrawals by age 72 or face a hefty penalty.

💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.

The Takeaway

Deciding at what age to retire is a personal choice. However, by planning ahead for some common expenses, and understanding the age at which you can get full Social Security benefits, you can use a retirement calculator formula to figure out how much money you’ll need each year to live on. And you can supplement your Social Security benefits with other forms of income and by making smart decisions about savings and investments.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

How do I calculate my retirement age?

To calculate your full retirement age, which is the age you can receive your full retirement benefits, you can use the Social Security administration’s retirement age calculator . Essentially, if you were born in 1960 or later, your full retirement age is 67. For those born between 1954 and 1959, the full retirement age is between 66 and 67, depending exactly how old they are when they retire (such as age 66 and two months). And for those born between 1943 and 1954, full retirement age is 66.

The earlier you retire before your full retirement age, the less you’ll receive in benefits. Conversely, the longer you keep working, up to age 70, the more you can receive.

Can you legally retire before 55?

Yes, you can legally retire before age 55. However, your Social Security benefits typically won’t kick in until age 62. And even then, because you’ll be tapping into those benefits before your full retirement age of 66 or 67, you’ll get a reduced amount, or just 70%, of your benefits.

There is something called the rule of 55 that allows you to withdraw funds from a 401(k) or 403(b) at age 55 without paying a penalty. That may be something to look into if you’re planning to retire early.

Can you retire after 20 years of work?

In some lines of work, you can retire after 20 years on the job and likely get a pension. This includes those in the military, firefighters, police officers, and certain government employees.

That said, anyone in any industry can retire at any time. However, Social Security benefits don’t typically begin until age 62.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOIN0323011

Read more

What Is the Average Retirement Age?

The average retirement age in the US is age 65 for men and age 62 for women, but those numbers don’t reveal the extremely wide range of ages at which people can and do retire.

Some people retire in their 50s, some in their 70s; some people find ways to keep pursuing their profession and thus never completely “retire” from the workforce. The age at which someone retires depends on a host of factors, including how much they’ve saved, their overall state of health, and their desire to keep working versus taking on other commitments.

Still, having some idea of the average age of retirement can be helpful as a general benchmark for your own retirement plans.

What Is the Average Age of Retirement in the US?

Overall, the average retirement age in the U.S. is 64.

Age 65 may be what most of us think of as the best age to retire, but not all regions of America are hitting this goal. According to the U.S. Census Bureau’s American Community Survey, the average U.S. retirement age in:

•   Hawaii, Massachusetts, and South Dakota is 66.

•   Washington, D.C., is 67.

•   Residents of Alaska and West Virginia it’s 61.

A lower cost of living may be what’s helping West Virginia residents retire so young. West Virginia was one of the 10 most states in the country with the lowest costs of living, according to a 2023 study by Consumer Affairs.

Recommended: Cost of Living by State

While those previously mentioned states give a look at two ends of the average retirement age spectrum in the United States, many states have an average retirement age that falls closer to what one might expect.

Colorado, Connecticut, Iowa, Kansas, Maryland, Minnesota, Nebraska, New Hampshire, New Jersey, North Dakota, Rhode Island, Texas, Utah, Vermont, and Virginia all have an average retirement age of 65.

Boost your retirement contributions with a 1% match.

SoFi IRAs now get a 1% match on every dollar you deposit, up to the annual contribution limits. Open an account today and get started.


Only offers made via ACH are eligible for the match. ACATs, wires, and rollovers are not included.

Expectations vs Reality

Expectations can lead to disappointment. Any kid with an overly ambitious wishlist for Santa Claus knows that.

Now imagine a person spending most of their adult life expecting to retire at 65 and then realizing their retirement savings just isn’t enough. Ideally, that won’t happen, but it has happened to many.

According to The Employee Benefit Research Institute’s Retirement Confidence Survey Summary Report, the expected average age of retirement in 2023 was 65. However, as noted previously, the Census places the average retirement age in the US at 64. Retiring earlier than planned could lead to not having enough money to retire comfortably.

How to Know When to Retire

Not everyone retires early by choice. More than four in 10 people retired earlier than they expected, mostly because of health problems, disabilities, or changes within their organizations.

It can be difficult for workers to exactly predict at what age they will retire due to circumstances that may be out of their control.

In order to bridge any financial gap caused by not having enough retirement savings, 51% of pre-retirees expect they will earn an income during their retirement by working either full time or part time.

While the survey found that respondents are aware of what they need their retirement savings to look like, there is a gap between their expectations and their actions.

Seventy-nine percent of pre-retirees reported that they agree they should be doing more to prepare for their retirement. However, only 48% reported having a strong retirement plan in place, with 19% of Gen Xers and 31% of millennials admitting to not saving for retirement at all.

A lack of awareness seems to be leading to a lack of preparedness: 25% of pre-retirees surveyed said they aren’t sure how much money they are currently saving for retirement.


💡 Quick Tip: Before opening any investment account, consider what level of risk you are comfortable with. If you’re not sure, start with more conservative investments, and then adjust your portfolio as you learn more.

How Much You Should Have Saved for Retirement?

To retire comfortably, the IRS recommends that individuals have up to 80% of their current annual income saved for each year of retirement. With the average Social Security monthly payment being $1,177, retirees may need to do a decent amount of saving to cover the rest of their future expenses.

This is something to keep in mind when choosing a retirement date.

It’s Never Too Early to Start Saving for Retirement

Retirement can last 30 years or more. As lovely as that sounds, financial security is key to enjoying a relaxing retirement.

Any day is a good day to start saving, but saving for retirement while a person is young could help put them on the path toward a more secure retirement. The more years their savings have to grow, the better.

“A very helpful habit,” explains Brian Walsh, CFP® at SoFi, “Is truly automating what you need to do. Recurring contributions. Saving towards your goals. Automatically increasing those contributions. That way you can save now and save even more in the future.”

The Department of Labor (DOL) estimates that for every 10 years a person waits to begin saving for retirement, they will have to save three times as much every month to play catch-up.

3 Steps to Start Preparing for Retirement

It’s not enough to have an idea of the best time to retire. To really reach that goal, it’s important to have a financial plan in place. These steps break down how to prepare for retirement.

Step 1: Estimate how much money you’ll need

One of the first steps a person could take toward their retirement saving journey is to estimate how much money they need to save. There is a retirement savings formula that can help you estimate: Start with your current income, subtract your estimated Social Security benefits, and divide by 0.04. That’s the target number of retirement savings per year you’ll need.

Step 2: Set up retirement saving goals

It might be worth considering what retirement savings plans are available, whether that is an employer-sponsored 401(k), an IRA, or a simple savings account. Contributing regularly is key, even if big contributions can’t be made to retirement savings right now.

Making small additions to savings can add up, especially if extra money from finishing car payments, getting a holiday bonus, or earning a raise can be diverted to a retirement savings account.

If an employer offers a 401(k) match, it might be beneficial to take advantage of that feature and contribute as much as the employer is willing to match.

Along with receiving free money from an employer, there are also tax benefits of contributing to a 401(k). Contributions to a 401(k) happen pre-tax — that lowers taxable income, which means paying less in income taxes on each paycheck.

In addition, 401(k) contributions aren’t taxed when deposited, but they are taxed upon withdrawal. Withdrawing money early, before age 59 ½, also adds a 10% penalty.

Step 3: Open a Retirement Account

If access to an employer-sponsored 401(k) plan isn’t available — or even if it is — investors might want to consider opening an IRA account. For investors who need a little help sticking to a retirement savings plan, they could consider setting up an automatic monthly deposit from a checking or savings account into an IRA.

In 2023, IRAs allow investors to put up to $6,500 a year into their account ($7,500 if they’re older than 50). There are two options for opening an IRA — a traditional IRA or a Roth IRA, both of which have different tax advantages.

Traditional IRA

Any contributions made to a traditional IRA can be either fully or partially tax-deductible, and typically, earnings and gains of an IRA aren’t taxed until distribution.

Roth IRA

For Roth IRAs, earnings are not taxable once distributed if they are “qualified”—which means they meet certain requirements for an untaxed distribution.

Late to the Retirement Savings Game?

Starting to save for retirement late is better than not starting at all. In fact, the government allows catch-up contributions for those over the age of 50. Catch-up contributions of up to $7,500 in 2023 are allowed on a 401(k), 403(b), SARSEP, or governmental 457(b).

A catch-up contribution is a contribution to a retirement savings account that is made beyond the regular contribution maximum. Catch-up contributions can be made on either a pre-tax or after-tax basis.

As retirement gets closer, future retirees can plan their savings around their estimated Social Security payments. The official Retirement Estimator tool provided by the U.S. Social Security office could help by basing the estimate on an individual’s actual Social Security earnings record.

While this estimate is not a guarantee, it might give a retiree — or anyone planning when to retire — an idea of how much they might consider saving to supplement these earnings.

Social Security benefits can begin at age 62, which is considered the Social Security retirement age minimum. However, full benefits won’t be earned until full retirement age, which is 65 to 67 years old, depending on birth year.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Invest with as little as $5 with a SoFi Active Investing account.

FAQ

Does the average retirement age matter?

The age at which you retire affects your Social Security benefit. For instance, if you retire at age 62, your benefit will be about 30% lower than if you wait until age 67.

What is the full retirement age for Social Security?

The full age of retirement is 67 for anyone born in 1960 or later. Before that, the full retirement age is 66 for those born from 1943 to 1954. And for those born between 1955 to 1959, the age increases gradually to 67.

How long will my retirement savings last?

One strategy you could use to help determine how long your retirement savings might last is the 4% rule. The idea behind the rule is that you withdraw 4% of your retirement savings during your first year of retirement, then adjust the amount each year after that for inflation. By doing this, ideally, your money could last for about 30 years in retirement. However, your personal circumstances and market fluctuations may affect this number, which means it could vary. It’s best to use the 4% rule only as a general guideline.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

SOIN0922048

Read more
Businessman on cell phone

How to Roll Over Your 401(k)

It’s pretty easy to rollover your old 401(k) retirement savings to an IRA, a new 401(k), or another option — yet millions of workers either forget to rollover their hard-won retirement savings, or they lose track of the accounts.

According to a 2021 study by Capitalize, some 24 million 401(k) accounts seem to be forgotten or “lost”, with an average balance of about $55,000 in these dormant accounts.

Given that a 401(k) rollover just takes a couple of hours and, these days, minimal paperwork, it makes sense to know the basics so you can rescue your 401(k), roll it over to a new account, and add to your future financial security.

How Does Rolling Over Your 401(k) Work?

Many people wonder how to rollover a 401(k) when they leave their jobs. First, you need to know the difference between a transfer and a rollover.

A transfer is when you move funds between two identical types of retirement accounts. For example, if a person moves money from an old 401(k) to a new 401(k), a traditional IRA to another traditional IRA, or from an old Roth IRA to a new Roth IRA — that’s a transfer. It’s the most direct way to move funds from one tax-advantaged account to another.

A rollover is when you move money between two different types of retirement accounts. For example: You might rollover a 401(k) to an IRA.

💡 Recommended: What Is an IRA and How Does It Work?

Bear in mind, rollover accounts can be different, but must have the same tax treatment. You can’t rollover a tax-deferred traditional 401(k) to a Roth IRA without doing some kind of Roth conversion.

Steps to Roll Over Your 401(k)

Here are the basic steps, with more detail to follow:

1.    Decide whether you want to roll it over to an IRA (a common option); transfer the funds to another employer’s 401(k); or set up an account like a self-directed IRA.

2.    Set up the rollover account. Remember that rollovers have to be apples to apples in terms of tax treatment: a tax-deferred 401(k) to a traditional IRA; a Roth 401(k) to a Roth IRA.

3.    Contact your former employer or 401(k) plan sponsor to initiate the rollover. (Depending on which rollover option you choose, the process or paperwork may be slightly different.)

4.    Generally, the funds are sent to you in a check although they can be wired to a rollover IRA at a new institution, for example. Either way, you have 60 days to deposit the funds in another tax-deferred account, or you will owe taxes on the money and possibly a penalty.

Benefits of Rolling Over Your 401(k)

Once you understand how to roll over a 401(k), it’s easy to understand what the advantages are. First and foremost, by doing a rollover, you ensure that you are in charge of your retirement funds (which is important, after years of investing in your 401(k)).

Other pros include:

•   Your investment account costs will likely be lower once you do a rollover, because leaving your savings in your old 401(k) when you’re no longer an employee means you may pay higher account management fees. Fees matter, and can substantially reduce your savings over time.

•   You may have more investment choices. Typically, when you do a rollover from a 401(k) to an IRA at a new institution, your investment options increase which might improve portfolio returns and could further reduce fees.

•   If you don’t want a self-directed portfolio, where you choose the investments in your rollover, you may be able to choose a robo-advisor or automated portfolio so there’s less for you to manage.

•   If you have more than one 401(k) from various jobs, you can consolidate them as part of the rollover process.

Disadvantages of Rolling Over a 401(k)

Since you want to avoid retirement mistakes, it’s also important to consider some of the reasons why a rollover may not be the best idea.

•   First, if you have a lot of appreciated company stock, you may be able to pay a lower tax rate on the gains if you transfer the stock to a brokerage account.

•   While a rollover account at a different institution may provide more investment options, if you keep your 401(k) where it is, you may be able to buy investments at the cheaper institutional rate.

•   If you do a rollover, you may lose some of the federal legal protections that come with 401(k) plans. For example, the money in your 401(k) is typically protected from creditors or collections, whereas the money in an IRA is shielded by state laws, which can vary.

•   In some cases, your employer may allow you to withdraw funds from your 401(k) without paying the usual 10% penalty, if you are 55 or older when you leave your job.

Pros and Cons of Doing a 401(k) Rollover

Pros

Cons

Potentially lower investment fees, which can impact savings over time. If you have company stock in your 401(k), it might save on taxes if you transfer the stock to a brokerage rather than doing a rollover.
More investment choices; more control over your portfolio. Investment options may cost less in a 401(k) vs. an IRA.
The option to switch to a robo advisor if you prefer an automated approach. Keeping your 401(k) may offer legal protection from creditors or collections.
Ability to consolidate accounts. Keeping your money in your 401(k) could give you penalty-free access before age 59 ½ vs. an IRA.

When Is a Good Time to Roll Over a 401(k)?

Once you know how to roll over a 401(k), and you’ve decided that’s your next step, doing it as soon as you leave your job is likely the best time. But you can generally do a rollover any time. It’s your money. If you decide to do the rollover five years after leaving your job, that’s a better time than never.

That said, if you have a low balance in your 401(k) account — for example, less than $5,000 — your employer might require you to do a rollover. And if you have a balance lower than $1,000, your employer may have the right to cash it out. Be sure to check the exact terms with your employer.

In most instances, you have 60 days from the date you receive an IRA or 401(k) distribution to then roll it over into a new qualified plan. If you wait longer than 60 days to deposit the money, it will trigger tax consequences, and possibly a penalty. One rollover per year is allowed under the rules.

5 Things You Can Do With Your Old 401(k)

If you’re still asking yourself, But how do I rollover my 401(k)?, here are five possible choices that might make sense when deciding how to handle your old account.

Option 1: Leave Your 401(k) Where It Is

Is it ever a good idea to let sleeping 401(k)s lie? Sometimes, yes.

For instance, maybe your old job was with a super-hip, savvy startup that chose a stellar plan with multiple investment options and low administration fees that stayed in place even after you left your job. This is rare! But the point is: If you’re happy with your portfolio mix and you have a substantial amount of cash stashed in there already, it might behoove you to leave your 401(k) where it is.

Other than that, you probably want to make sure you’re in charge of your money — not your former employer.

Also, besides any additional fees you might end up paying, racking up multiple 401(k)s as you change jobs could lead to a more complicated withdrawal schedule at retirement.

Option 2: Roll Over Your 401(k) Into an IRA

If your new job doesn’t offer a 401(k) or other company-sponsored account like a 403(b), don’t worry: You still have options that’ll keep you from bearing a heavy tax burden. Namely, you can roll your 401(k) into an IRA, or Individual Retirement Account.

The entire procedure essentially boils down to three steps:

1.    Open a new IRA that will accept rollover funds.

2.    Contact the company that currently holds your 401(k) funds and fill out their transfer forms using the account information of your newly opened IRA. You should receive essential information about your benefits when you leave your current position. If you’ve lost track of that information, you can contact the plan sponsor or the company HR department.

3.    Once your money is transferred, you can reinvest the money as you see fit. Or you can hire an advisor to help you set up your new portfolio. It also may be possible to resume making deposits/contributions to your rollover IRA.

Option 3: Roll Over Your 401(k) to Your New Job

If your new job offers a 401(k) or similar plan, rolling your old 401(k) funds into your shiny, new 401(k) account may be both the simplest and best option — and the one least likely to lead to a tax headache.

That said, how you go about the rollover has a pretty major impact on how much effort and paperwork is involved, which is why it’s important to understand the difference between direct and indirect transfers.

How to Roll Over Your 401(k): Direct vs Indirect Transfers

Here are the two main options you’ll have if you’re moving your 401(k) funds from one company-sponsored retirement account to another.

A direct transfer, or direct rollover, is exactly what it sounds like: The money moves directly from your old account to the new one. In other words, you never have access to the money, which means you don’t have to worry about any tax withholdings or other liabilities.

Depending on your account custodian(s), this transfer may all be done digitally via ACH transfer, or you may receive a paper check made payable to the new account. Either way, this is considered the simplest option, and one that keeps your retirement fund intact and growing with the least possible interruption.

Another viable, but slightly more complex, option, is to do an indirect transfer or rollover, in which you cash out the account with the express intent of immediately reinvesting it into another retirement fund, whether that’s your new company’s 401(k) or an IRA (see above).

But here’s the tricky part: Since you’ll actually have the cash in hand, the government requires your account custodian to withhold a mandatory 20% tax. And although you’ll get that 20% back in the form of a tax exemption later, you do have to make up the 20% out of pocket and deposit the full amount into your new retirement account within 60 days.

For example, say you have $50,000 in your old 401(k). If you elected to do an indirect transfer, your custodian would cut you a check for only $40,000, thanks to the mandatory 20% tax withholding.

But in order to avoid fees and penalties, you’d still need to deposit the full $50,000 into your new retirement account, including $10,000 out of your own pocket. In addition, if you retain any funds from the rollover, they may be subject to an additional 10% penalty for early withdrawal.

Option 4: Cashing Out Your 401(k)

One recent review of 401(k) accounts found that 21% of Americans who left their jobs during the pandemic also cashed out their 401(k) accounts. Generally speaking, withdrawing these retirement funds is not a good idea, and here’s why.

Because a 401(k) is an investment account designed specifically for retirement, and comes with certain tax benefits — e.g. you don’t pay any tax on the money you contribute to your 401(k) — the account is also subject to strict rules regarding when you can actually access the money, and the tax you’d owe when you did.

Specifically, if you take out or borrow money from your 401(k) before age 59 ½, you’ll likely be subject to an additional 10% tax penalty on the full amount of your withdrawal — and that’s on top of the regular income taxes you’ll also be obligated to pay on the money.

Depending on your income tax bracket, that means an early withdrawal from your 401(k) could really cost you, not to mention possibly leaving you without a nest egg to help secure your future.

This is why most financial professionals generally recommend one of the next two options: rolling your account over into a new 401(k), or an IRA if your new job doesn’t offer a 401(k) plan.

Option 5: Rolling Your 401(k) Over to a Self-Directed IRA

A self-directed IRA, sometimes called a SDIRA, is an unusual type of retirement account — and it’s not widely available. That’s because these types of accounts aren’t just for traditional securities, but for alternative investments normally not permitted in traditional IRAs: i.e. real estate, collectibles (like art and jewelry), commodities, precious metals, and more.

These accounts are considered self-directed because, first, they are only available through certain financial firms that will custody SDIRA accounts, not manage them. Second, SDIRA custodians can’t give financial advice, so all the due diligence and asset management falls to the investor.

While you can consider doing a rollover to a SDIRA, be sure that setting up such an account makes sense for your current holdings, or whether a traditional IRA or Roth might do just as well.

The Takeaway

It’s not difficult to rollover your 401(k), and doing so can offer you a number of advantages. First of all, when you leave a job you may lose certain benefits and terms that applied to your 401(k) while you were an employee. Once you move on, you may pay more in account fees, and you will likely lose the ability to keep contributing to your account.

Rolling over your 401(k) — to a new employer’s plan, or to an IRA — gives you more control over your retirement funds, and could also give you more investment choices.

There are some instances where you may not want to do a rollover, for instance when you own a lot of your old company’s stock, so be sure to think through your options.

If you know that moving your 401(k) money over to an IRA is the right thing, SoFi makes it super easy. Once you open an investment account with SoFi Invest and set up a traditional or Roth IRA account, you can transfer the funds from your old 401(k) and either keep the same (or similar investments), or choose new ones.

For a limited time, opening and funding an Active Invest account gives you the opportunity to get up to $1,000 in the stock of your choice.

FAQ

How can you roll over a 401(k)?

It’s fairly easy to roll over a 401(k). First decide where you want to open your rollover account (usually an IRA), then contact your old plan’s administrator, or your former HR department. They typically issue a check that can be sent directly to you or to the rollover account at a new institution.

What options are available for rolling over a 401(k)?

There are several options for rolling over a 401(k), including transferring your savings to a traditional IRA, or to the 401(k) at your new job. You can also leave the account where it is, although this may incur additional fees. It’s generally not advisable to cash out a 401(k), as replacing that retirement money could be challenging.

Does SoFi allow you to roll over your 401(k)?

Yes, you can rollover funds from a 401(k) to a rollover IRA with SoFi.

To initiate the rollover, set up an account with SoFi Invest, and contact your 401(k) plan administrator or the HR department of your previous employer.


SoFi Invest®
INVESTMENTS ARE NOT FDIC INSURED • ARE NOT BANK GUARANTEED • MAY LOSE VALUE
SoFi Invest encompasses two distinct companies, with various products and services offered to investors as described below: Individual customer accounts may be subject to the terms applicable to one or more of these platforms.
1) Automated Investing and advisory services are provided by SoFi Wealth LLC, an SEC-registered investment adviser (“SoFi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC.
2) Active Investing and brokerage services are provided by SoFi Securities LLC, Member FINRA (www.finra.org)/SIPC(www.sipc.org). Clearing and custody of all securities are provided by APEX Clearing Corporation.
For additional disclosures related to the SoFi Invest platforms described above please visit SoFi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

SOIN0822021

Read more
TLS 1.2 Encrypted
Equal Housing Lender