Rollover options
Each time you change jobs you need to decide what to do with the money in your 401(k) plan. While you can typically leave the money in a former employer’s 401(k) plan, there’s also an opportunity to transfer your retirement savings to an individual retirement account or a new 401(k) plan. Here’s how to roll over your retirement savings when you leave a job.
Updated on May 16, 2018: This slideshow was originally published on Oct. 23, 2017, and has been updated with new information.
Maintain the tax benefits.
You can maintain the tax benefits of your 401(k) plan by rolling the account balance over to an IRA or transferring your savings to a new employer’s 401(k) if the plan allows it. However, there’s no need to make a quick decision. In most cases you can leave the money in a former employer’s 401(k) plan. Take some time to find another tax-deferred account that has the investment options you want at the best possible price.
Transfer your money directly.
If you decide to move your money, you can avoid taxes and penalties by having the account balance directly transferred to a new retirement account via a trustee-to-trustee transfer. If a check is made out to you, 20 percent will be withheld for income tax. If you don’t put the entire distribution, including the withheld 20 percent, in a new retirement account within 60 days you will owe income tax on that money. A 10 percent early withdrawal penalty could also apply if you are under age 55. A trustee-to-trustee transfer allows you to avoid the tax withholding and potential fees.
Find better investment options.
401(k) plans have a limited menu of funds, typically chosen by an employer, plan sponsor or consultant. While some 401(k) plans provide excellent investment options for participants, other 401(k) plans are riddled with overpriced funds and unnecessary fees. IRAs have a much wider selection of investment options. Take some time to shop around for the investments that make the most sense for your retirement portfolio. A job change can be an opportunity to move your money into better funds with lower fees.
Keep costs low.
Retirement accounts charge a variety of administrative and maintenance fees and each individual fund charges an expense ratio or fee to maintain the fund and perhaps other costs. However, it is increasingly possible to find retirement accounts and funds that charge very low fees. It’s especially important to choose low-cost funds for your retirement savings because you are investing over a long period of time and might pay those fees for several decades. Paying lower fees means you get to keep more of your investment returns.
Pay attention to vesting schedules.
You don’t get to keep your employer’s contributions to your 401(k) account until you are vested in the plan. Some 401(k) plans provide immediate vesting, while others don’t let you keep all of the company contributions until you stay at the job for as long as five or six years. Pay attention to the vesting schedule when making job change decisions, and make sure you get all the retirement contributions you are entitled to.
Watch out for waiting periods.
You may not be able to join the 401(k) plan on your first day at a new job. Some employers have waiting periods before you can begin to save in the company retirement plan. Make a note of the date when you can contribute to a new employer’s 401(k) plan. There may be an additional waiting period before you qualify for a 401(k) match or other company contributions.
Consider your age.
If you lose or leave your job at age 55 or later, you will be able to withdraw money from your 401(k) plan without incurring the 10 percent early withdrawal penalty. However, rolling your savings over to an IRA means you will need to wait until age 59 1/2 to take penalty-free withdrawals. If you will need to use your retirement savings between ages 55 and 59 1/2, consider leaving it in a 401(k) plan.
Don’t roll over company stock.
Company stock gets special tax treatment inside an employer-sponsored 401(k) plan. When company stock is withdrawn from the 401(k) plan it may be taxed at the long-term capital gains tax rate, which could be lower than your ordinary income tax rate. However, if the company stock is rolled over to an IRA, the appreciation will be taxed at your ordinary income tax rate when it is withdrawn from the account.
Consolidate your accounts.
You will probably change jobs several times throughout your career, so you might have multiple 401(k) accounts with different employers. It can be difficult and time-consuming to keep track of several accounts and make sure you are properly diversified. Consider opening an IRA that you move your money into each time you change jobs. This can make your money easier to manage and you might qualify for low fees or other perks if you maintain a large balance at a single financial institution.
Don’t cash out.
It can be tempting to take a lump sum from your retirement account when you change jobs. However, a withdrawal before age 55 triggers income tax and a 10 percent early withdrawal penalty. A 30-year-old worker in the 24 percent tax bracket who cashes out a $10,000 401(k) balance would incur $3,400 in taxes and fees. In contrast, moving that money into another 401(k) or IRA is generally a tax-free event and allows your savings to continue to grow until retirement.
More from U.S. News
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How to Pay Less Tax on Retirement Account Withdrawals
10 Tips for Rolling Over a 401(k) When You Change Jobs originally appeared on usnews.com
Update 05/16/18: This slideshow was originally published on Oct. 23, 2017, and has been updated with new information.
