Changing Jobs? Take Your 401(k) and Roll It
Most of us have a 401k through work and are in the same boat when it comes to knowing all of our options. The dilemma becomes especially urgent if and when one loses their steady line of employment. And in a fluctuating economy, unemployment is something always lurking just around the corner for all of us.
It is wise to know what you are entitled to before you decide to change jobs or find yourself the unhappy recipient of the proverbial “pink slip”. 401(k) account holders are entitled to what is referred to as a “distribution” of their “vested balance.” Vesting refers to what percentage of the employer’s contribution to your 401k you are entitled to keep. Longtime employees who have been “vested” in the company will keep 100% of the contributions made by their employer, as well as those they have added to their balance on their own.
Know Your Vesting Schedule
If you are thinking about changing jobs, before you jump, it is important to know your vesting schedule. Some companies offer immediate vesting while others are vested on a tier basis. You become entitled to more of your employers’ contribution for each year of employment. As an example, if you were fully vested at 5 years and you were 6 months away from your 5 year mark, sticking out your job for another 6 months could mean thousands of additional dollars in your 401k. If you are unsure of your vesting schedule, the answer can be found in your SPD (Summary Plan Description) which can be obtained by contacting your benefits department or the company managing your employers’ 401k program.
“Roll” Forward with 401(k)
Upon leaving your employment you now have four options with your 401k. The first is to cash it out and receive the money. The second option may or may not be available to you and is specific to each 401k plan, is to leave it in your existing 401k. The third option is to roll it over to your new employers’ 401k if your new plan allows for rollovers. Finally you can rollover your 401k to an IRA (Individual Retirement Account). If you are like most people it is hard to look at the amount in your 401k and not think about all the ways that money could help you financially right now. This is a great time to remind yourself the reason why you were diligently deferring money out of your paycheck each week. This money was being set aside for your retirement. Even small 401k plans can have a big impact 30 years down the road at retirement.
If you took your balance in cash, you would have to pay taxes. The exceptions to this are Roth 401(k) or after-tax contributions. Worst of all, if you have not reached the age of 59 1/2 you will be penalized up to ten percent of the distribution. This certainly puts a fiscal crimp on all those contributions you have made over the years. It is no wonder that rolling over a 401k into an IRA is seen as a wise alternative measure.
Everyone’s situation is different and is beneficial to work with a financial planner to choose the best option for your needs.
There are two types of rollovers to consider with your old 401k plan. The first is a direct rollover and the second is a 60 day rollover. A direct rollover is when your old 401k writes a check for your balance to your new retirement plan. This is not always possible, and some plans will cash out your old 401k automatically and send you a check. If this is the case you have a second option which gives you 60 days to take that check and deposit it in another qualifying retirement plan. Doing it correctly is key and may take an advisor to hold your hand through the process. If a check was cut on your behalf, you may have had taxes withheld from the check leaving you to come up with the difference on the rollover amount. This all sounds very complicated and a lot of work. It doesn’t have to be though! Using a financial planner that you trust can ease your mind and make sure that the rollover is handled properly and with your best interests at hand.
An IRA versus another 401(k) account
There are pluses and minuses to everything. With an IRA, you have more investing options. An IRA will open up your investment options to include stocks, bonds and other investment securities previously unavailable to you through your 401k.
A 401(k) plan typically restricts your investing to a handful of securities. Depending on the investor, this can leave you uncomfortable and wanting more control over your investments.
As with all financial decisions, it is best to speak with my own accountant, financial or investment advisor before making a move to roll 401k into IRA plans. With just a little bit of research, and the right person to hold your hand through the process, the money you have saved for the future can continue to be invested for your retirement.