Switching jobs? If you have a 401(k) plan it's a good time to review your financial decisions and choices linked to it — a process that's much easier if you understand the options.
There are three workable opportunities for continuing the growth of retirement funds. You can (1) leave it where it is, (2) roll it over to the new employer’s plan or (3) create an individual account (IRA) of your own. A fourth option — cashing out the account — involves early withdrawal penalties, tax implications and loss of any long-term growth. Figuring out which route offers more advantages for continued investment is the first step.
If you read the plan's agreement, you know that some employer plans accept rollovers, others may not. Plan sponsors maintain the membership guidelines. This may limit which options you have with your 401(k). In some cases, the former employer’s plan allows the sponsor to cash-out the account when you end employment. Withdrawals could trigger income taxes and a 10 percent penalty.
Before you start, gather account documents (statements) and the plan contacts together. When you signed up for the plan, you may have selected both a 401(k) and a Roth IRA. These are two separate accounts.
- 401(k) contributions are not taxed—subject to taxes and penalties for early withdrawal
- Roth contributions are taxed—withdrawals may not taxed
It’s a good idea to talk with a financial planner before starting the process. First, you want to choose the right type of retirement account and secondly avoid paying taxes or penalties for choosing the wrong plan. If you roll the 401(k) into a Roth, prepare to pay taxes on the full amount.
A financial planner can help in making a good decision as you continue saving. He or she will review the previous employer’s plan and weigh the benefits of the new employer’s retirement plans. More importantly, their involvement will make sure the necessary steps are taken to move your funds without repercussions to you.
If you leave the money in the previous employer’s plan, it’s a good idea to have a planner review the plan’s progress. It may be time to shift or re-evaluate your investment allocation. If you decide to move the funds, the previous plan’s administrator can send the check to a designated contact. You should talk to a planner or tax prepare to coordinate the transaction and avoid tax issues.
- 401(k) plans are traditionally pre-selected group funds and can have limited investment options.
- IRAs allow for diversity with different investment categories and much more varied options.
Depending on the length of the previous employment, you need to check the vesting schedules. Vesting schedules are tied to the employer’s contributions (employer’s match). The schedules determine the amount and date when the employer’s contributions are legally yours. Your own contributions are fully vested from day one.
Age is another factor. Sometimes, if you switch jobs and turn 55 in the same year, you may withdraw funds from the 401(k) without penalty. Rolling the funds into another 401(k) or IRA imposes a higher age limit of 59 years and six months to avoid withdrawal penalties, depending on the plan. Once again, talking with a financial planner is the best advice when making financial decisions and avoiding costly mistakes.
Your new employer may have a waiting period before you can rollover the funds. Your planner may suggest that you open an investment account to continue contributions during the waiting period. Opening another account allows you to take advantage of the tax deduction until you make your final decision. Keeping the investment growth active could be more beneficial for you in the long run.
You’ve saved for retirement using an employer’s plan. A financial planner will help you understand the regulations of moving the retirement funds. They will also help navigate any future changes and can help make recommendations on investment options.
This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.