Blog

What to Do with Your 401k When You Change Jobs

401k

            A 401(k) is a retirement plan that is sponsored by your employer and is added through your pay. Some employers also match what you add to your 401k to help you save money even faster. There are penalties that you must face when you withdraw money from this account before you retire and there are annual limits that you can contribute to this account.

            You can learn more about 401k’s and how to contribute to them by doing a little research online. 

                This article will give you some information about what to do with your 401k when you change jobs. There are rules that you must follow in order to avoid penalties and there are also things that you can do to avoid having to pay extra taxes on your 401k.

Information

                If you are changing jobs and have had a 401k, there are rules that you must follow in order to avoid penalties and extra taxes. You have some options and some of those are listed below.

1.       Leave It Where It Is

You can just leave your 401k where it is especially if you have invested more than $5,000 in it. If you leave it, you will not be able to contribute to it anymore but you will have everything you have already contributed. If you have a large amount of money invested in it already, it might be a good idea to leave it where it is. If you think that you will forget about the account or you are just not happy with it for any reason, you have other options.

2.       Roll It Over to Your New Employer

If you are moving to a new employer, see if they offer 401k’s and if they do, see if they allow rollovers. Some employers require that you are employed with them for a number of days before you can begin to contribute to retirement plans, so make sure that you get it set up as soon as you can. You will want everything set up before you can roll over your previous retirement plan.

It is a simple procedure to roll over your old plan to a new one. It is just a matter of contacting the person that was in charge of your old plan and signing some paperwork. They can roll it over directly to your new account. You can also get a check and then indirectly add that to your new account if you would rather do that.

3.       Roll It into an IRA

If you are not moving to a new employer, you still have options for your 401k. You could roll it over to an IRA account on your own. You can choose any financial institution that you wish to since you are no longer bound by the rules of your employer. There are several types of IRAs so be sure to check them all out before you decide which one is best for you. You can look here to see more information about IRAs: https://www.investor.gov/additional-resources/retirement-toolkit/self-directed-plans-individual-retirement-accounts-iras. You could even start a self-directed IRA that allows you to add the investments of your choice that could include real estate, precious metals, and other items that you might want to invest in. Any IRA would be a great way to roll over your 401k.

4.       Take Distributions

If you are over the age of 59 ½, you can begin to take distributions from your 401k without any penalties. If you are retiring this would be the best idea for you since you will not have to pay the 10% penalty for withdrawing early. You will have to start paying taxes on your withdrawals just like you would any income unless you have had a Roth account. If you have had a Roth account, all the withdrawals are tax-free if you have had it for at least five years.

If you are under 59 ½ you can still take distributions from your account but you will have to pay a penalty of 10%. If you are between 55 and 59 ½ the penalty does not apply. You need to be careful about taking distributions because you want to avoid all the extra taxes and penalties.

5.       Cash it Out

If you want to, there is nothing stopping you from cashing out your 401k and just taking a lump sum. You will have to pay taxes and the 10% penalty, but the rest of the money will be yours to use as you wish. This will reduce the amount of money that you will have for retirement, but this might be okay if you have plans to retire before you are 59 ½. You will need to be diligent about how you use the money in any case.

What Happens if You Don’t Rollover in 60 Days?

                If you fail to roll over your 401k in 60 days, you will face penalties and extra taxes. This would essentially be the same as if you decided to cash it out. This is a decision that you can make, but many financial advisors would caution you not to do this. They would suggest that you roll it over into something else that can provide for you during your retirement.

What is a Direct Rollover?

                This is when the rollover goes from your previous job to your new job without you seeing any of the money. You will do the paperwork and it will go seamlessly from one account to the new one. The distribution is not made to you, it is given to your new account. An indirect rollover would be one that you would be given a check from your old account and then you would add that to your new account.

What is the Required Minimum Distribution or RMD?

                RMD is the amount of money that you must withdraw from your 401k after you reach the age of 73. There will be penalties if you fail to withdraw this amount each year unless you are still working and your 401k was rolled over to your new job. You would still have to use your money if you didn’t roll it over to your new employer.

Conclusion

                You have many options if you are leaving a job that has a 401k for you. You can roll it over to a new account, leave it where it is, roll it over to an IRA, cash it out, or start taking distributions. All of these options have their pros and cons so you will have to decide which is best for you. It would be best if you talked to a financial advisor to help you to make the decision. They are paid to help you make the best decision for your money.

                There are rules and regulations that apply to each option, as well. There may be extra taxes or penalties that you must pay if you don’t follow all the rules and regulations. You just have to be careful and do what is right for you. You could have many years ahead of you to plan for. 

Tools   Lifestyle   Legal   Investing   Personal Finance   Broker   Career