There’s a pretty good chance you’ve had more than one job in your career. As a result, that means you’ve probably made contributions to more than one retirement plan. Job hopping is becoming increasingly common, and more and more people face holding several retirement plan accounts from various employers.
You are allowed to leave jobs and keep the money sitting in that job’s retirement plan, but this is generally not the best course of action. It is important to understand your options for what to do with a 401k after leaving a job.
Leave the Money Where It Is
You probably aren’t required to move your money right away. If your balance is $5,000 or more, you’re allowed to leave the money where it is. However, if your balance is less than that, your provider may elect to cash it out and send you a check or roll the money into an IRA.
Be sure to check the rules, but if possible, it is a good idea to leave the money where it is for the first six months. This allows you to get adjusted to the new job, ensure you’re going to stick with it, and become familiar with your new plan.
Once you’re established in your new position, you may decide to leave the money with your previous employer’s plan indefinitely. This could be because you feel comfortable with your previous investment options or because your old plan has lower fees. Even if you leave your funds where they are, be sure to keep tabs on your money. Take time to regularly review your accounts and the company, and be sure to keep reading your statements and keeping up with the paperwork.
Move the Money to Your New Company’s Plan
You have the option of moving the money directly into your new employer’s retirement plan. May employers even offer a plan-to-plan rollover option, which means no tax consequences or penalties, in addition to instructions and support from your new employer on how to go through the process.
When doing this, be sure to contact your current account custodian, fill out any necessary paperwork, and then do the same with your new account custodian. You have 60 days to re-deposit your money into a new account before it becomes labeled a “cash-out,” which will result in tax liabilities and possibly even penalties.
Roll It Into a Traditional or Roth IRA
This is a good option if you tend to jump from job to job as you climb the career ladder. All the old money from your old 401(k) plans and retirement plans can be held in a singular account. When you do this rollover, you do not face any tax penalties.
If possible, it is a good idea to leave the money where it is for the first six months.”
You have an endless array of investment options, including stocks, bonds, mutual funds, exchange-traded funds, and more. In contrast, employer-sponsored plans typically offer a limited menu of investment options for you to choose from.
Also, you have the ability to allocate your IRA dollars amongst various trustees/custodians. There’s no limit to how many trustee-to-trustee IRA transfers you can do in a year, so you have the freedom to switch to a new trustee if you’re dissatisfied with your investment performance.
With IRAs, you tend to have more flexibility with distributions as well. The timing and amount of distributions are generally up to you, but once you reach the age of 70.5, you will be required to withdraw some amount of minimum distributions.
It is important to note that if you rollover 401(k) money into an IRA, you usually have to pay taxes on the amount you roll over - minus any after-tax contributions you’ve made - but after that, any future qualified distributions from the Roth IRA will be tax-free.
Thus, you have a lot more discretion in how you invest your money.
Take a Lump-Sum Distribution (Cash It Out)
Of course, you always have the option of taking the money out. This is called a lump-sum distribution, but it is highly recommended that you avoid this option at all costs. You will have to pay income taxes on it, and if you are under the age of 59.5, you will probably be required to pay an additional 10% on top of that.
Add state taxes on top of that, and you face the potential to lose a lot of those savings. Beyond that, you lose retirement savings momentum and risk not having sufficient savings for when you actually reach retirement age.
Be Careful About Leaving Before You Are Vested
You won’t be able to keep your employer’s 401(k) match or profit-sharing contributions when you leave a job unless you are vested in the plan. Some plans provide immediate vesting for matching contributions, but the majority of companies require you to stay with the employer for a certain number of years before you can keep the match. In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”.)
Some companies have a graded vesting schedule, where you vest gradually (20% per year) until you’re fully vested at 6 years. Some plans have faster-vested schedules. And you’re also 100% vested once you reach your plan’s retirement age.
Outstanding Plan Balance
If you took out a loan from your 401(k), you need to repay it in full when you leave the company. If you fail to repay it, the loan amount will count as income, and you’ll pay an additional penalty of 10% of the amount that was borrowed if you are under 59 ½ years old.
Sometimes, when layoffs occur, employers may initiate a change in the plan that allows you to make post-employment repayments. That means you keep making payments as an employee just as you were doing while employed with the company. Because it is a loan that you are repaying, it doesn’t trigger any penalties or count towards your income.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. ("CFS"), a registered broker-dealer Member FINRA/SIPC and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. The Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2018.