A Closer Look At Your Available Options
The good news is whatever money thats in your 401 is yours to do with as you like. But when you no longer work for a company, any retirement accounts you have through your former company might need to be moved to your new employer. Or you may need to roll it over or into a brokerage account that you own completely.
When Changing Jobs Is This Your Best Option
When an employee leaves a job due to retirement or termination, the question about whether to roll over a 401 or other employer-sponsored plan quickly follows. A 401 plan can be left with the original plan sponsor, rolled over into a traditional or Roth IRA, distributed as a lump-sum cash payment, or transferred to the new employers 401 plan.
Each option for an old 401 has advantages and disadvantages, and there is not a single selection that works best for all employees. However, if an employee is considering the option of transferring an old 401 plan into a new employer’s 401, certain steps are necessary.
Making The Right Decision For You
A rollover is often seen and planned for as a one-time event. Request the rollover to a new account, invest the money once deposited, and move on with your to-do list. However, any decision regarding a prior employer 401 can impact the fees you pay on your investments, the level of control you have over your accounts, your overall investment strategy, and even your ability to effectively use a backdoor Roth IRA strategy. With so much on the line, its critical to make the right call.
With the right strategy in place, youll make a more informed decision and keep your money working hard for you for years to come.
- Saving + Investing
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What Spouses Should Know
If you are the spouse of someone who plans to roll over their 401 balance to an IRA, be aware that you’d lose the right to be the sole heir of that money. With the workplace plan, the beneficiary must be you, the spouse, unless you sign a waiver.
Once the money lands in the rollover IRA, the account owner can name any beneficiary they want without their spouse’s consent.
Here’s another potential misstep: Making a withdrawal from your 401 to give to your ex-spouse as dictated in a divorce agreement. That won’t work the money will be considered a distribution to you, subject to taxation, as well as potentially a penalty if you’re under age 59½.
In a divorce, retirement assets that are awarded to the ex-spouse can only be distributed penalty-free via a qualified domestic relations order, or QDRO. That document is separate from the divorce decree and must be approved by a judge.
What To Do With Your 401 When You Leave A Job
You’ve landed your dream job, or you’ve been laid off, and you’re ready to say goodbye to your current employer. But before you go, you have some decisions to make about your 401.
While there may be some guidance from human resources, is generally up to you to decide what you should do with your retirement savings when you change jobs. So, what happens to your 401k plan when you leave a job?
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What Is A 401 To 401 Transfer
A 401 to 401 transfer is simply the movement of your old 401 to combine it with your new 401. Once the transfer is complete, youre left with one 401 at your new employer.
An important step to remember is to check with your new 401 provider to ensure that they accept 401 roll-ins. This means that youre able to transfer outside 401 plans into the new one. Most plans do allow this, but its best to check first to make sure.
Keep Tabs On The Old 401
If you decide to leave an account with a former employer, keep up with both the account and the company. People change jobs a lot more than they used to, says Peggy Cabaniss, retired co-founder of HC Financial Advisors in Lafayette, California. So, its easy to have this string of accounts out there in never-never land.
Cabaniss recalls one client who left an account behind after a job change. Fifteen years later, the company had gone bankrupt. While the account was protected and the money still intact, getting the required company officials and fund custodians to sign off on moving it was a protracted paperwork nightmare, she says.
When people leave this stuff behind, the biggest problem is that its not consolidated or watched, says Cabaniss.
If you do leave an account with a former employer, keep reading your statements, keep up with the paperwork related to your account, keep an eye on the companys performance and be sure to keep your address current with the 401 plan sponsor.
Keeping on top of how the plan is performing is important, as you may later decide to do something different with your hard-earned money.
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Cover Any Gaps In Health Insurance
You have a couple of options.
- COBRA continuation coverage: You and your family can continue to have health insurance for a while after losing your coverage through work. Because you pay the full premium, it can be pricey, but going without coverage, even for a short time, can be a risk. Previous dental and/or vision insurance is included as part of COBRA, too.
- A Health Insurance Marketplace plan: Cost varies based on your household income and available plans vary from state-to-state. Visit healthcare.gov to learn more.
- A spouse/partner insurance plan: Usually you need to sign up within 30 days of your last day on the job.
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About Ryan Guina
Ryan Guina is the founder and editor of Cash Money Life. He is a writer, small business owner, and entrepreneur. He served over 6 years on active duty in the USAF and is a current member of the IL Air National Guard.
Ryan started Cash Money Life in 2007 after separating from active duty military service and has been writing about financial, small business, and military benefits topics since then. He also writes about military money topics and military and veterans benefits at The Military Wallet.
Ryan uses Personal Capital to track and manage his finances. Personal Capital is a free software program that allows him to track his net worth, balance his investment portfolio, track his income and expenses, and much more. You can open a free account here.
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Transfer The Money To A New Employer
If your new employer has a retirement plan, you may be able to transfer, or roll over, your existing 401 funds. You may also be able to roll over as much of your money as you like into an alternative savings plan, such as an individual retirement account . Rolling over an existing account to your new employer’s plan allows you to retain the full value of your account without new taxation or deductions.
Assets May Also Be Temporarily Frozen
Access to your funds, vested or not, may also be blocked if litigation related to the plan is in process. In such instances, assets may be temporarily frozen. Similarly, short-term restricted access to your funds may happen in the event the plan sponsor is changing record keepers or there is a blackout period in which funds cannot be changed or accessed in any way. You should know about this in advance as this is legal, and notices must be provided to active participants at least 30 days prior to the blackout start date.
Recently terminated employees may also be subject to different rules regarding access to their plans. These rules are governed by things such as resolving any lingering financial issues around a worker’s departurean outstanding loan, for example. If you’ve taken out a 401 loan and leave your job, you’ll have a specified time period in which to pay it back.
Finally, a lock may occur due to suspected fraudulent activity on the account. While fraud alerts are meant to protect account holders, sometimes they may be unaware of the alert and will need to call customer service to release the hold.
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Move Your 401 To Your New Employer
If your new employer has a retirement plan, you can ask your former employer to automatically transfer your money to the new 401. Direct transfers may take a few days or weeks, depending on the 401 plan.
You may also opt to receive a check with your 401 balance so that you can deposit it to your new 401. In this case, you have 60 days to deposit the check into the new plan. Any delays past the 60-day deadline attract an income tax and penalty on early withdrawals.
Avoid These Costly Mistakes When Rolling Over A 401 To An Ira
- Before you move your money, be sure you know the rules that differ between 401 plans and IRAs.
- If the rollover process is done incorrectly, it could be considered a distribution, which would make it subject to taxation and, possibly, an early withdrawal penalty.
- There are also some situations that call for caution before embarking on the rollover.
So you’ve left your job and want to move assets from your workplace savings plan to an individual retirement account.
You may want to pause before doing the rollover. If you’re not careful, you could make costly errors or lock yourself into a move that can’t be easily undone.
Both 401 plans and IRAs have the common purpose of letting you put away tax-advantaged savings for retirement. However, there are some rules that differ between the two. Even the rollover process itself can come with snags if you’re not careful.
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Here are some things to be aware of before initiating a rollover. These apply to traditional 401 plans and IRAs, whose contributions are generally made pre-tax.
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What Happens If You Cash Out Your 401
If you withdraw 401 money before age 59 ½, you could face a 10% penalty from the IRS on top of paying applicable income taxes. There are some exceptions, such as if you leave your job at age 55 or later or if you make a hardship or other eligible withdrawal, but its a good idea to consult a tax professional before cashing out your 401.
No matter when you cash out your 401, though, you may owe income tax on what you withdraw if its a traditional account or investment earnings in a Roth account that you didnt start contributing to at least five years before.
What To Do With Your 401 When Switching Jobs
Americans are switching from one job to the next as they bounce from one career to another. But, what is happening to your 401 retirement plan in the process? There are four options for investors. You can leave your 401 with your old employer, roll it over to your new employers 401 plan, roll it over into an IRA, or simply cash it out.
A report from the Government Accountability Office suggests that 401 retirement plan participants may not be making the best choices about what to do with their former employers 401 plan after they switch jobs.
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Consider Your Options Carefully
There is no one right 401 move for everyone, but by exploring your options, you can determine what is right for you.
Consider your choices carefully before deciding. Talk to human resources representatives and plan administrators at your old job and your new job. You may also want to discuss options with financial advisor.
Most importantly, if you do decide to move the money from one plan to another, pay attention to asset transfer rules to avoid missing a deadline or creating an unexpected taxable distribution.
You Get To Consolidate Accounts
Usually when people work on their financial plans, the first thing they start to tackle is improving organization and clarity around their money. Consolidation helps achieve those goals.
When you have a large number of accounts all scattered across multiple institutions, its a lot to manage. Its hard to track balances, fees, and all the other little details associated with each account that you need to know. It makes things more complicated than they need to be when having everything in one place is an option.
Not to mention, when you reach your official retirement and need to take withdrawals from your retirement accounts, having them all at one financial institution is really helpful. If you have 10 different retirement account with 10 different institutions, you have to create withdrawal strategies and processes for each one.
Youll either need to work to consolidate everything at that point, or work with all of your old employers and financial institutions to coordinate those withdrawals. Consolidation means one less thing you need to worry about with your finances.
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When Does This Make Sense
- Your old 401 is quite good: When your old retirement plan has low administrative fees and a good list of low-cost investment options from which to choose, leaving your money in your old plan could be a good option.
- You want to use a backdoor Roth IRA strategy: If you are currently using or thinking about using a backdoor Roth IRA strategy, you may want to leave your 401 where it is. If you roll over your account, especially if it has before-tax contributions , you could jeopardize your ability to make a backdoor Roth IRA contribution or run afoul of the pro-rata rule.
- You want a simple solution: Simply put, its the easiest option for now. Theres nothing you have to do when you leave the company. However, while its the easiest thing to do today, it can make things more complicated down the road.
- You want extra asset protection: Qualified retirement plans are offered a greater level of protection against creditors and some lawsuits compared to IRAs and Roth IRAs. The laws are quite nuanced and can vary from state to state. If greater asset protection is important, be sure to talk to a qualified professional or attorney to make the right call.
Leave Your 401 In Your Former Employers Plan
Many Americans leave their 401s behind when they change jobs, at least temporarily. The key advantage of this is that their 401 savings remain invested in a tax-deferred account, and theres no effort involved.
Ultimately, though, most people dont like the idea of having their money tied to their old employer for too long. Its much easier to lose track of what fees are being charged and what our money is invested in if its in an old 401 account that we rarely check. Theres also a risk that your old employer initiates whats known as a forced rollover to an IRA provider of their choice. This usually happens for small accounts under a certain size . Your old employer might also choose to switch 401 providers, which means your money gets moved to a new institution with different fees and investment options without your input.
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Leave Your Money With Your Former Employer
For some people, the most plausible option is to leave their investment with their former employer. This option allows you to continue making investments with the money even if you are not working with that employer. In most cases, old employers allow you to leave your investment if you have more than $5,000 in your 401 retirement savings account. If your account holds less than this amount, your previous employer may decide to cash out your plan and send you a check for the balance.
The advantage of this option is that it allows you to leave your 401 with your former employer if they offer good terms. Leaving your retirement account with your previous employer allows you to wait for registration to open with your new employer.
When you leave your 401 savings with your former employer, your access to your money can be limited. Some employers can levy huge maintenance fees, implement restrictions on investment choices and prevent access to your savings until you reach retirement age. Unless you’re about to retire and you know you won’t change jobs often, avoid leaving your 401 with your former employer.
Determine If You’re Better Off Rolling Your Account Or Leaving It
Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.
If you’ve decided to leave your current job for another, you will need to decide what to do with the money that you have invested in your current company’s 401 plan. Options typically include leaving it where it is, rolling it over to a new employer’s plan, or opting for an IRA rollover. If you are about to change jobs, here’s what you need to know about rolling over your funds into a new employer’s 401 plan and the ins and outs of other options.
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