Follow the Rules for 401(k)’s When Changing Jobs - Rodgers & Associates

Follow the Rules for 401(k)’s When Changing Jobs

A report released this spring from the Government Account­ability Office found workers who left their jobs had to navigate an “ineffi­cient rollover process” and “misleading state­ments” from 401(k) plan service providers. When leaving their employer, 401(k) plan partic­i­pants must decide what to do with their savings. Their options include cashing out, leaving the 401(k) where it is, rolling the old 401(k) into a new employer 401(k) plan, or rolling over to an IRA.

Cashing out – All pre-tax contri­bu­tions are subject to tax and possibly a penalty. The employer is required to withhold 20% of the distri­b­ution for tax. You can put the entire amount into a qualified retirement plan within 60 days to avoid the tax and penalty.

Leave it – Not all employers permit this option. The advantage could be a large employer who offers low-cost investment options not available otherwise. The funds remain tax-deferred until withdrawn. You can elect the other options at a later time.

Roll to a new plan – Not all new employers permit this option. The rollover is not taxable and tax deferred growth of your funds can continue. Compare the investment options and costs of the old 401(k) with the new one to determine if this is the best choice. You may be able to access the funds — penalty free — at age 55 if you meet require­ments.

Roll to an IRA – An IRA rollover is not taxable and allows tax-deferred growth to continue. An IRA has nearly unlimited investment options, but the costs may be higher than inside an employer plan. IRAs are not subject to withdrawal restric­tions which may be present in an employer plan. However, many employer plans permit loans from their 401(k). You cannot borrow money from your IRA. IRA distri­b­u­tions are subject to tax penalty until age 59 ½.

The right decision when separating from your employer often involves details of your personal situation, which can’t be answered with a simple rule-of-thumb. A good financial adviser can help you evaluate your options and make an informed decision.