Your 401(k) can be a significant asset which you accumulated at work after one year or after a career. So what do you do with your 401(k) when you switch jobs or retire?
Your Current 401(k) Plan
The benefits of your 401(k) plan include the ability to defer paying income taxes until the money is withdrawn at retirement. In addition, many plans also include an employer match which may vest immediately or over a period of time. Therefore, you want to understand the vesting schedule of your plan before you make the final decision to leave for greener pastures.
Your 401(k) Plan Choices When You Leave Your Employer
You typically have three options to choose from when you leave employment where you have ownership in a 401(k) plan. They include:
- Leaving the money where it is. This may be a good option if your new employer does not have a 401(k) plan and you like your existing plan. You may however, have to keep a minimum balance there and having more than one 401(k) account may be difficult to manage. In addition, it is likely you will no longer have access to the account, can no longer contribute to the account and you could be charged extra maintenance fees.
- Rolling the money over into your Individual Retirement Account. IRAs may have lower fees than a 401(k) plan. However, a carefully analysis of fees should be done. IRAs have more investment choices than typical 401(k) plans. With an IRA you can choose whoever you want as the beneficiary. This is unlike 401(k) plans where your spouse must be the beneficiary unless the spouse has consented in writing to forego that benefit. Generally 401(k) monies are protected from creditors and bankruptcy. However, IRA monies do not get the same protection.
- Moving the money to your new employer’s plan. This may be a good option if it is allowed by your new employer. However, you should first review the investment options and fees of the plan. In addition, consolidating your retirement accounts makes them easier to manage.
The 4th option is to cash out. This option would be a poor financial decision. Don’t do it! If you withdraw your 401(k) monies before you are 55 you would pay income tax and a 10% early withdrawal penalty, unless you meet one of the exceptions. This option reduces the value of an investment vehicle which should be used to grow your retirement funds tax free.
Questions to Ask Yourself When You Are Rolling Over Your 401(k) Plan Monies
In summary, you should ask yourself:
- Where can I get the lowest fees, both investment and administrative?
- Where can I get the best investment options?
- Do I want to simplify the number of investment accounts?
- What is the vesting schedule of my existing 401(k) account?
- Should I be concerned with asset protection?
There is no right answer when deciding what to do with your 401(k) plan when you switch jobs or retire. You must thoughtfully go through the analysis asking your self questions like those outlined above.
Methods of Rollover Retirement Plan Monies
You can either have the 401(k) balances paid directly to you or paid directly to the new retirement plan. In my mind, there are no benefits to having the money paid directly to you.
If the 401(k) monies are paid directly to you there is an income tax withholding requirement of approximately 20%. You will receive 80% of the monies and have 60 days to have the entire amount (100% of the monies) deposited into the new retirement account. That means you will need to replace the 20% withholding money with money from outside the 401(k). If the money is not rolled over within that time frame you are also charged a 10% penalty. This assumes you are not 59 1/2 and do not meet any of the exceptions.
If you have determined you will be rolling the money from your former employers 401(k) account to a new retirement account the safest thing to do is a direct rollover to the new retirement plan.
Have you recently switched jobs or retired? If so, how did you handle your 401(k) plan assets?