Changing jobs can be an exciting life event. Maybe you are relocating to a new city, have better benefits, more vacation time, a higher salary, and other perks to enjoy - but what do you do with your 401(k) plan?
While a new career door has opened, it’s important to evaluate the options with your 401(k) as you are closing the door with your previous employer. Here’s what you need to know.
Leave Your 401(k)
Depending on your former employer’s policy, you may be able to leave your existing funds in their sponsored account. Most employers require a minimum balance for this option, so check with your company’s Human Resources team or Payroll Specialist before leaving.
If they allow you to leave the funds in an existing account, great. That gives you more time to plan for a potential rollover when you start your new job. Some employers require minimum employment before allowing team members to enroll in their 401(k), so leaving your existing account with a former employer is convenient if that’s the case.
Move Your 401(k)
If your new employer offers a retirement plan, talk to the Human Resources team about a plan-to-plan rollover. This allows participants to take their existing retirement funds from a former employer and roll it into a new account. Typically, when you rollover funds, there are no tax consequences or penalties, but you can double-check with your new employer to ensure you are processing the transfer correctly.
If you withdraw a lump sum from an old account to deposit into a new one, you will most likely owe taxes on the amount withdrawn. If you choose this option over a rollover, make sure you report the amount on your taxes for the year the withdrawal and distribution are made.
Rollover Into an IRA
If you don’t have a new employer yet, rolling your 401(k) into an Individual Retirement Account (IRA) is a great option. You can choose to invest in stocks, bonds, real estate, mutual funds, and much more - it’s ultimately your decision! Another perk is that by processing a rollover from an existing 401(k) into an IRA, you will avoid the tax penalties that come with total withdrawals.
To complete a rollover, there are a few different options to choose from, including:
- Direct Rollover - distributions from a retirement plan can be paid directly into another retirement plan or IRA.
- Trustee-to-Trustee Transfer - distributions from an IRA with the financial institution holding your IRA can make payments directly from your existing IRA to another IRA or retirement plan.
- 60-Day Rollover - distributions from an IRA or retirement plan are paid directly to you and must be deposited into a new IRA or retirement plan within 60 days.
To learn more about rollover options, visit the Internal Revenue Service (IRS).
One downside to this method is that by moving your funds into a personal IRA, your automatic contributions and savings momentum will pause temporarily. You can still choose to make payments into your IRA, but it is always wise to discuss your strategy with a financial advisor. Together, they can help you explore various options and develop a plan to maximize your savings over time. As a member or customer at your financial institution, these services are typically free.
Cash Out Your 401(k)
Suppose you liquidate an account before the minimum distribution age (typically 59 ½ years old). In that case you will face hefty tax and early withdrawal penalties. Because of this, you will be unnecessarily draining your retirement accounts, so most financial advisors will strongly caution against this.
If you’re retired or have reached the minimum distribution age, you may qualify to withdrawal without penalties. Accountholders that are age 59 ½ and older can take money out of their retirement accounts without the 10% tax penalty. However, suppose you retire or change careers earlier than age 59 ½. In that case, you will have a tax penalty for any withdrawals you make. Once you reach age 72, you will be required to begin account withdrawals. To learn precisely how much you should be taking out during each distribution period, look at the worksheet provided by the IRS or use our retirement path calculator.
While changing jobs is always an exciting adventure, it’s crucial to handle the big financial decisions that come with it so you can continue to maximize your retirement savings efforts. If you currently have an account with Slavic401(k), you can review questions related to withdrawals and fees here, but if you have an account with another financial institution, you will want to contact them directly.
If you have questions about setting up an account with Slavic401(k) through your employer, contact us here.