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If you’re one of the many workers hoping to find a better position elsewhere, be sure to look out for the 401 (k) plan account you are leaving behind.
According to a recent Bankrate survey, around 55% of workers say they will be looking for a new job in the next year. The hunt for greener pastures known as the “Great Resignation” is coming more than a year into the Covid pandemic and for many people it is working from home – causing some of them to look for more flexibility and higher Strive for payment.
While not all employees have a 401 (k) or similar company retirement plan, those who do should be aware of what happens to their account when they leave their jobs and what options there are – and which are not.
“I know changing jobs can be stressful, but don’t forget your 401 (k),” said certified financial planner Marguerita Cheng, CEO of Blue Ocean Global Wealth in Gaithersburg, Maryland.
Here’s what you should know.
First, outstanding loans
Of the 401 (k) plans that allow participants to borrow money, about 13% of savers have a loan on their account, according to Vanguard research. The average loan balance is around $ 10,400.
If you quit your job and you are still in debt, there is a good chance your plan will require you to repay the balance fairly quickly; Otherwise your account balance will be reduced by the amount owed and treated as a distribution.
In simple terms, unless you can deposit that amount into a qualifying retirement account, it is considered a distribution that may be taxable. And if you are under 55 at the time of leaving, you will pay a 10% early repayment penalty. (Employees who leave their company when they reach this age are subject to special exit rules for 401 (k) plans – more on this below.)
If it is initially a distribution, you have until the tax day of the following year to replace the loan amount – i.e. if you leave in 2021, you can get the funds until 15.15, 2022 if you file an extension). Before major tax changes came into force in 2018, participants only had 60 days.
According to Vanguard, about a third of the plans allow their ex-employees to continue paying the loan even after they leave the company. Hence, it is worth checking the policy of your plan.
Leave the money or move it?
Your first way to manage your retirement assets is to leave them on your former employer’s plan, if allowed. Of course, you can no longer pay into the plan or get an employer match.
While this may be the easiest instant option, it could add more work in the future.
“The risk is you might forget it later,” said Will Hansen, executive director of the Plan Sponsor Council of America.
Basically, it can be difficult to find old 401 (k) accounts when you lose track. (Incidentally, there is a bill pending in Congress that would create a “lost and found” database to make it easier to find lost accounts.)
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Also, be aware that if your bankroll is low enough, the plan may not let you stay on it, even if you want to.
“If the balance is between $ 1,000 and $ 5,000, the plan can send the money to you [individual retirement account] on behalf of the person, “said Hansen.” If it’s under $ 1,000, they can cash you out.
“It’s up to the plan.”
Your other option is to transfer the balance to another qualifying retirement plan. This could include a 401 (k) with your new employer – assuming rollover is accepted by other plans – or an IRA.
if [the balance is] they can cash you out under $ 1,000. It’s up to the plan.
Will Hansen
Executive Director of the Plan Sponsor Council of America
Note that a Roth 401 (k) can only be transferred to another Roth account. These types of 401 (k) and IRAs include after-tax contributions, which means you won’t get any upfront tax break like traditional 401 (k) plans and IRAs do. But the Roth money grows tax-free and remains untaxed for qualified withdrawals.
If you decide to move your retirement assets, consider doing a trustee-to-trustee rollover, which involves sending the transfer directly to the new 401 (k) plan or the IRA custodian.
Even if the money you put in your 401 (k) is always yours, this cannot be said about employer contributions.
Vesting schedules – the length of time you need to stay with a company so that the related contributions are 100% yours – range from up to a year to six years. Any amounts not transferred will generally be forfeited when you leave your company.
Reasons to take a break
There’s such a thing as the 55 rule: if you quit your job in or after the year you turn 55, you can take payouts off your 401 (k) with no penalty.
If you transfer the funds to an IRA, you will lose the ability to tap into the funds before the age of 59½, the default age at which you can generally withdraw from retirement accounts without paying a penalty.
If you are the spouse of someone planning to transfer their 401 (k) balance to an IRA, be aware that you would lose the right to be the sole heir to that money. The workplace plan requires you, the spouse, to be the beneficiary unless you sign a waiver allowing you to be another person.
Once the money ends up in the rollover IRA, the account holder can designate anyone as a beneficiary without their spouse’s consent.
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