Changing Jobs? Don't let your 401(k) slip away.
Changing Jobs? Don't let your 401(k) slip away.
Today's job market is more transitory than ever. And, as more
and more individuals switch jobs, they begin to wonder what they
should do with the money they have accumulated in their
employer-sponsored retirement plans such as their 401(k) plans.
The good news for 401(k) plan participants is that your
retirement plan assets are very portable so you may be able to
keep your existing 401(k) plan assets in a tax-deferred
environment.
The trick is to resist the urge to use the monies. After tucking
money away in your 401(k) for quite some time, you may be
tempted to use it to treat yourself to a new car or some other
indulgence. Because it could literally take years to replace
your existing 401(k) funds, you should think carefully before
prematurely taking money from your retirement savings.
A hasty withdrawal decision by someone under age 55 could easily
wipe out a third of your 401(k) assets. If you decide you want a
lump-sum withdrawal paid directly to you, the 401(k) plan
trustee must withhold 20% for federal income tax and, if you do
not attain age 55 prior to the end of the year in which you
separate from service, the trustee must also withhold an
additional 10% premature distribution penalty. So you will
receive a net payout of 70 to 80% of your existing 401(k) plan
account balance. After age 55, however, the premature
distribution penalty is no longer imposed if your withdrawal is
prompted by your separation from service with the employer
sponsoring the plan.
Of course, if you choose to take a withdrawal, you may, within
60 days of the distribution, subsequently decide to deposit it
into an IRA as a qualified rollover. However, for the withdrawal
and re-contribution to be a tax neutral event, you would need to
deposit the gross distribution amount into the IRA, which means
you need to replace the withheld monies with funds from another
resource such as your personal savings.
If you can resist the urge to take a withdrawal when you change
jobs, you are one step closer to making a distribution decision
that will preserve your hard-earned money. To be in the best
position to make an informed decision, you should consider other
options available for your existing 401(k) assets, such as: *
leave your assets in the 401(k) plan, * transfer your assets to
a new employer's 401(k) or retirement plan, or * roll your
assets into an IRA.
Leaving your assets in the 401(k) plan may not be your best
option. It depends on your existing 401(k) plan's provisions.
Some plans have limited investment options for employees who
have separated from service and some have restrictive
distribution options. However, most plans do allow employees who
separate from service to roll their 401(k) assets to a new
employer's 401(k) plan, or retirement plan, or to roll to an
IRA.
Transferring your existing 401(k) assets to a new employer's
plan may be an option. To do so, you must first meet the
eligibility requirements of your new employer's plan.
Additionally, the trustee on the new plan must agree to accept
your assets, which may be a concern, especially if your existing
401(k) assets include shares of employer stock. Information on
other considerations involved in transferring your existing
401(k) assets to your new employer's 401(k) plan is available
from your new employer.
A direct transfer to an IRA avoids the mandatory withholding of
the 20% for income tax and the 10% for the premature
distribution penalty, if applicable. Your 401(k) plan trustee
may simply transfer your plan assets electronically or may cut a
check payable to your IRA. Once in your IRA, the assets continue
to accumulate tax-deferred. One of the more attractive aspects
to rolling your existing 401(k) into an IRA is your control
feature. Not only do you have more control over your investment
options; but, you will also have more control over the timing
and manner of your distributions.
Your 401(k) plan account balance represents your savings;
therefore, it is important to make informed distribution
decisions that will preserve your hard-earned money. To learn
more about the portability of your 401(k) assets, or for more
information on preserving your 401(k) assets and 401(k)
retirement planning strategies based on your particular
situation, please contact a Financial Advisor for a
complimentary consultation.