If you've just been let go, or are making a career change, your 401(k) is likely at the bottom of your to-do list. Believe it or not, doing something with your 401(k) is an extremely important step that needs to be well-thought-out. When you leave an employer there are usually three ways you can continue to grow your retirement savings. The first step is to understand which route offers the most benefits for continued growth that aligns with your next chapter towards retirement.
The first step is to read your plan's contract. This will help you understand if your new employer plan will accept a rollover, which some cannot. Ultimately, plan sponsors are in charge of these guidelines. In some cases, your previous employer's plan allows the sponsor to cash-out the retirement account when you are no longer employed there. Withdrawals from retirement accounts can generate income tax and a 10% penalty.1
Before you begin, collect appropriate statements and contacts. If you signed up for the retirement plan, you may have chosen both a traditional 401(k) and a Roth 401(k). Please note that these are two separate accounts. Traditional 401(k) contributions are not taxed but are penalized in the event of early withdrawal. Roth 401(k) contributions, on the other hand, are taxed, but withdrawals will have no adverse effect provided the distribution is deemed qualified by the IRS.2
It's a good idea to meet with a financial advisor before starting the process. You need to choose the right type of retirement account and avoid paying taxes or fines for choosing a plan that is not right for you. For example, if you want to turn your 401(k) into a Roth, you should be prepared to pay tax on the full amount.
A financial advisor can help you make informed decisions while you keep saving for retirement. They can offer support by reviewing your previous employer's plan and weighing the benefits of your new employer's retirement plans. Most importantly, their participation ensures that the necessary measures are taken to move the retirement funds with limited impact.
If you left money in your previous employer's retirement plan, it's a good idea to have a financial advisor review the plan's progress. Often times, if you choose to do a rollover of the retirement funds, the previous plan administrator can mail the check to a specific contact. Working with your advisor is beneficial as he or she can coordinate these transactions.
Depending on the length of your previous assignment, you might also want to review the vesting schedules. The vesting schedules are tied to the employer's contributions and determine the amount and date on which the employer's contributions are lawfully yours. Your own retirement contributions are fully vested from day one.
Age is another factor in deciding how to approach a former employer's 401(k). For example, if you quit, were laid off, or fired in the year of your 55th birthday, you can withdraw money from the 401(k) without penalty.3 If you choose to transfer the retirement money to another 401(k ) or IRA, you will have to wait to withdraw these funds until you are 59 1/2 to avoid the 10 percent withdrawal penalty. Keep in mind, this no-penalty payout is not applicable to 401(k) accounts with previous employers. It is only in relation to the account opened with the employer that you left when you were 55 years old or older. If you are unsure which options are right for you, consult a financial advisor to allay your concerns and avoid costly mistakes.
It's also important to note that your new employer may have a waiting period before you can rollover funds. In this case, your advisor may suggest that you open an investment account in order to continue retirement contributions during the waiting period. If you open another account, you can take advantage of the tax deduction until you make your final decision. Continuing to invest towards retirement and keeping investment growth active can be more beneficial to you in the long run.
Moving from old to new jobs, you're on the right path because you've already started saving for retirement. Working with a financial advisor will provide you with more information and understanding of the rules needed to best manage your retirement funds. They will also help you navigate future changes you may encounter.