While working at a company, you may participate in their retirement plan. This is a great choice to save for your future. However, you may be left with questions if you and your employer decide to part ways. One of the most common questions is “What happens to my 401(k) plan when I leave my job?” There are many things to consider when looking at plan assets from a prior employer. Take a look at the most common questions below.
What should I do with my plan assets if I leave my job?
You have several options for your retirement savings after leaving an employer. In general, you can:
- Leave your money in the plan. You can leave your money where it is if your balance is at least $5,000. Your money stays invested and you’re still subject to the plan’s rules, you just can’t contribute to it any longer.
- Roll over your money to an IRA. An IRA can offer new investment options and allow you to gather multiple retirement accounts at one investment company, in one account.
- Roll over your money to your current employer’s plan. If your current plan accepts rollovers, you can roll over the balance from your old plan. Generally, you can roll over your old 401(k) before even being eligible to contribute to your new employer’s plan. In most cases, you don’t pay taxes on a direct rollover.
There are important factors to consider when rolling over money to an IRA or leaving assets in your previous employer’s retirement plan. These factors include, but are not limited to, investment options in each type of account, fees and expenses, available services, potential withdrawal penalties, and required minimum distributions.
Consider costs, investments, and services.
If you’re deciding whether to leave your money in your old employer’s plan or roll it over, here are three things to consider.
- Every dollar you pay in investment costs and account fees takes away from your return. Your 401(k) plan sends you an annual notice of its costs and fees. Compare these to what you might pay for an IRA account.
- An IRA may offer more investment options than your retirement plan. On the other hand, your retirement plan may offer less expensive investment options not available to the public. If you’re satisfied with your current investments, it may make sense to stay in your plan. However, if you’re looking to expand your options, a rollover might be worth considering.
- Once you part ways with an employer, the services you were receiving with your 401(k) plan, such as investment advice, may no longer be available to you. However, you may be able to get similar or additional services elsewhere, either from your new employer’s plan or an IRA. Just be sure to ask how much you’d pay for the services offered.
What happens if I have an outstanding 401(k) loan when I leave my job?
If you have a loan and leave your employer, you must repay the loan in full. Otherwise, the unpaid loan balance will be reported to the IRS as a withdrawal. That amount may be subject to income tax and, if you’re under age 59 ½, you may also owe a 10% federal penalty tax.
Should I cash out my plan assets when I leave my job?
Think twice before cashing out – You can withdraw your entire balance when you leave an employer but doing that will probably cost you. If you cash out before age 59½, you’ll owe a 10% penalty on top of the federal and state income taxes, which could mean years of savings wiped out in a single day. Furthermore, you won’t even get a check for your full balance. The federal government takes their 20% tax up front upon your distribution.
What are the withdrawal rules?
Make sure you can get your money when you need it – In general, you can withdraw money from an IRA whenever you want. Employer plans, on the other hand, may limit how often you can withdraw, even after you leave the company. If you’re retired or retiring soon, make sure your plan’s withdrawal rules work for you. If you think you’ll need to access your money more often than the plan rules allow, consider rolling over to an IRA. Typically, you must begin withdrawing from your retirement plan accounts and IRAs when you reach age 70½. However, money in a Roth IRA is not subject to required minimum distributions (RMDs) during your lifetime. So, if you have Roth assets in your retirement plan, a rollover to a Roth IRA can protect those assets from RMDs and you can withdraw them on your own schedule.
Remember, when you leave your employer, you have options when it comes to your retirement accounts. If you’re still unsure what the best decision is for you, feel free to send me a note below. As always, I’m here to help.
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