The challenges young people face today regarding retirement planning are far more different than what their parents or grandparents faced in the past. In the past one could stay with one company 20-30 years and retire with a pension and a watch (of course). In today’s fast paced economy you have to be nimble and ready to move in a blink of an eye.
With the ever changing technology and things like artificial intelligence on the horizon young people may change jobs or even carriers more frequently than in the past. Making a decision to buy a home after getting out of college can seem burdensome or ball and chain considering many have the equivalent of a mortgage already in the form of student loans.
So if you find yourself considering a new job offer what are some of the things you should look at regarding a 401k or healthcare package? In most cases 401k plan administrators allow you to transfer from a previous plan to your new plan or rollover into an Individual Retirement Plan (IRA).
Some of the disadvantages of transferring to a new plan maybe limited investment options whereas rolling into an IRA you have countless investment options and more control. Also, your new plan might not allow loans to be taken if needed.
This is important if you’re in need of funds and are tempted to tap into your retirement savings you need to do the math on what that will cost you factoring the 10% penalty imposed by the IRS for early withdrawals. An alternative would be to consider a loan from your current plan. About 94% of companies with 401k plans allow to you to take out loans against the contributions you’ve made into the plan.
Even though it’s considered your money you still have to pay an interest rate on the funds borrowed. The plan administrator will usually set an interest rate of 1%- 2% over the prime rate which is currently at 3.75% which is more advantageous than the penalties you would incur plus being taxed at an ordinary income tax rate.
Any loans from a plan are not taxed at all (if repaid by the barrow). Now if the loan is not repaid when you separate employment then it will be considered a distribution taxed as ordinary income and a penalty would be applied if under 59 ½.
Whether you decide to transfer to a new plan or rollover into an IRA you’re still kicking the can down the road as far as deferring taxes since both are considered qualified plans and any withdraws in the future are taxed at an ordinary income rate. Currently ordinary income tax rates are relatively low in comparison to the past and most experts expect income taxes to be much higher in the future.
One thing young people should consider is taking more control of their retirement plan and take into consideration the tax implications for the future. If you’re separated from a previous employer then roll your plan into an IRA so you have more control.
If your new company 401k plan matches contributions well then great take advantage of that. But at the same time have a plan to combat future taxation by funding something like an Indexed Universal Life (IUL) policy. This type of policy has many living benefits if properly designed and the cost of insurance while you’re young is much less expensive.
You can link the cash value in an IUL to an index with no risk grow it over time. Then when you want to take distributions you can take tax-free loans on a regular basis or as needed and you don’t have to wait until 59 1/2. Other living benefits include Terminal Illness, Chronic Illness, Critical Illness, and Critical Injury which can be and addition to your new employer’s healthcare plan and make up any gaps that are not covered.