When you leave a job, voluntarily or due to a layoff, you are likely to have a lot on your mind. It is all too easy to set aside decisions about your employer-sponsored retirement plan account for another day. But it is usually important to act quickly. Whether you have a 401(k), 403(b) or 457(a) plan, here are your basic options when you leave a job.
Maintain the status quo
If your plan with your previous employer has a balance of at least $5,000, the plan must allow you the option to leave your money there. This is the simplest course of action in the short term, but not necessarily the best strategy in the long term. Your former employer may restrict your ability to make changes to your portfolio, take distributions or update beneficiaries. As a nonactive participant, you may also incur higher fees and receive less-effective communications about plan changes than active employees do.
However, you may want to consult with your financial advisor before liquidating your holdings if your previous employer offers a hard-to-duplicate investment option. This might include a high-yielding guaranteed investment contract or a stable value option. It is also important to discuss account liquidation with your financial advisor in a time of declining or unstable markets.
Roll it into your new plan
Rolling over your savings into your new employer’s plan can help you avoid potential downsides of staying with the old plan or trying to keep track of multiple plans. But before you take this step, review the investment options available in your new employer’s plan.
Also be aware of any fees or charges you may incur when rolling your old plan balance into your new employer’s plan. If there are fees, you might want to keep your existing savings in the old plan or roll your account balance into an IRA while still contributing to your new employer’s plan.
If, on the other hand, a rollover into your new employer’s plan seems like the best option, confirm that the plan accepts rollovers. Assuming it does, request a direct “trustee-to-trustee” rollover. Otherwise, your old employer will mail a distribution check to you, minus a mandatory 20% tax withholding. You then have just 60 days to deposit these funds in your new plan, plus you must cover the 20% that was withheld for taxes with other personal funds to achieve a 100% rollover.
Finally, if you fail to meet this 60-day deadline, or if you do not have the cash available to cover the taxes that were withheld, you must pay income tax on the amount that was not rolled over. And if you are under age 59½, you may incur an additional 10% early withdrawal penalty.
Transfer to an Individual Retirement Account
Transferring your retirement savings into an individual retirement account (IRA) offers several advantages. For one thing, an IRA typically provides a much wider array of investment options than most 401(k) plans do.
Most financial services companies will accept a direct transfer of your retirement savings, which can streamline the process and avoid potentially costly mistakes. In some cases, your assets can be transferred “in kind,” meaning you do not need to sell certain investments to hold them in your IRA. Be aware, however, that you may be charged an annual fee after rolling your savings into an IRA.
Unless you need the money to pay bills, consider the tax consequences before cashing out your retirement savings. Any distributions you take will be taxed as ordinary income and, if you are under age 59½, you may have to pay an additional 10% penalty on any withdrawals.
There are exceptions to the penalties — for example, in cases of economic hardship or if you separate from service at age 55 or older. Recent laws have expanded the exceptions on certain distributions to individuals who are impacted by the COVID-19 pandemic. Even if you qualify for an exception, you will owe ordinary income tax on the distribution.
Related Read: CARES Act Expands Financial Options for Impacted Plan Participants
When deciding what to do with your retirement account, remember this: Future financial security is job one. Do not let job-switching activities distract you from protecting your nest egg.
For more information, contact Peggy Vyborny at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Wealth Management Services.