Good Investments
that are Right for You

Business, career and placement concept - image from back of two employers sitting in office and shaking hand of young asian woman after successful negotiations or interview

Changing Jobs? Know Your 401(K) Options

If you’ve lost your job, or are changing jobs, you may be wondering what to do with your 401(k) plan account. It’s important to understand your options.

What will I be entitled to?

If you leave your job (voluntarily or involuntarily), you’ll be entitled to a distribution of your vested balance. Your vested balance always includes your own contributions (Pre-tax, After-tax, and Roth) and typically any investment earnings on those amounts. It also includes employer contributions (and earnings) that have satisfied your plan’s vesting schedule.

In general, you must be 100% vested in your employer’s contributions after 3 years of service (“cliff vesting”), or you must vest gradually, 20% per year until you’re fully vested after 6 years (“graded vesting”). Plans can have faster-vesting schedules, and some even have 100% immediate vesting. You’ll also be 100% vested once you’ve reached your plan’s normal retirement age.

It’s important for you to understand how your particular plan’s vesting schedule works because
you’ll forfeit any employer contributions that haven’t been vested by the time you leave your job. Your summary plan description (SPD) will spell out how the vesting schedule for your particular plan works. If you don’t have one, ask your plan administrator for it. If you’re on the cusp of vesting, it may make sense to wait a bit before leaving, if you have that luxury.

Don’t spend it

While this pool of dollars may look attractive, don’t spend it unless you absolutely need to. If you take a distribution you’ll be taxed, at ordinary income tax rates, on the entire value of your account except for any After-tax or Roth 401(k) contributions you’ve made. And, if you’re not yet age 55, an additional 10% penalty may apply to the taxable portion of your payout. (Special rules may apply if you receive a lump sum distribution and you were born before 1936, or if the lump sum includes employer stock.)

If your vested balance is more than $5,000, you can leave your money in your employer’s plan at least until you reach the plan’s normal retirement age (typically age 65). But your employer must also allow you to make a direct rollover to an IRA or to another employer’s 401(k) plan. As the name suggests, in a direct rollover the money passes directly from your 401(k) plan account to the IRA or other plan. This is preferable to a “60-day rollover,” where you get the check and then roll the money over yourself because your employer has to withhold 20% of the taxable portion of a 60-day rollover. You can still roll over the entire amount of your distribution, but you’ll need to come up with the 20% that’s been withheld until you recapture that amount when you file your income tax return.

Should I roll over to my new employer’s 401(k) plan or to
An IRA?

Assuming both options are available to you, there’s no right or wrong answer to this question. There are strong arguments to be made on both sides. You need to weigh all of the factors and make a decision based on your own needs and priorities. It’s best to have a professional assist you with this, since the decision you make may have significant consequences — both now and in the future.

Reasons to consider rolling over to an IRA:

  • You generally have more investment choices with an IRA than with an employer’s 401(k) plan. You typically may freely move your money around to the various investments offered by your IRA trustee, and you may divide up your balance among as many of those investments as you want. By contrast, employer-sponsored plans generally offer a limited menu of investments (usually mutual funds) from which to choose.
  • You can freely allocate your IRA dollars among different IRA trustees/custodians. There’s no limit on how many direct, trustee-to-trustee IRA transfers you can do in a year. This gives you the flexibility to change trustees often if you are dissatisfied with investment performance or customer service. It can also allow you to have IRA accounts with more than one institution for added diversification. With an employer’s plan, you can’t move the funds to a different trustee unless you leave your job and roll over the funds.
  • An IRA may give you more flexibility with distributions. Your distribution options in a 401(k) plan depend on the terms of that particular plan, and your options may be limited. However, with an IRA, the timing and amount of distributions are generally at your discretion (until you reach age 72 and must start taking required minimum distributions in the case of a traditional IRA).
  • You can roll over (essentially “convert”) your 401(k) plan distribution to a Roth IRA. You’ll generally have to pay taxes on the amount you roll over (minus any after-tax contributions you’ve made), but any qualified distributions from the Roth IRA in the future will be tax-free.

Reasons to consider rolling over to your new employer’s 401(k) plan (or stay in your current plan):

  • Many employer-sponsored plans have loan provisions. If you roll over your retirement funds to a new employer’s plan that permits loans, you may be able to borrow up to 50% of the amount you roll over if you need the money. You can’t borrow from an IRA — you can only access the money in an IRA by taking a distribution, which may be subject to income tax and penalties. (You can give yourself a short-term loan from an IRA by taking a distribution, and then rolling the dollars back to an IRA within 60 days; however, this move is permitted only once in any 12-month time period.)
  • Employer retirement plans generally provide greater creditor protection than IRAs. Most 401(k) plans receive unlimited protection from your creditors under federal law. Your creditors (with certain exceptions) cannot attach your plan funds to satisfy any of your debts and obligations, regardless of whether you’ve declared bankruptcy. In contrast, any amounts you roll over to a traditional or Roth IRA are generally protected under federal law only if you declare bankruptcy. Any creditor protection your IRA may receive in cases outside of bankruptcy will generally depend on the laws of your particular state. If you are concerned about asset protection, be sure to seek the assistance of a qualified professional.
  • You may be able to postpone the required minimum distributions. For traditional IRAs, these distributions must begin by April 1 following the year you reach age 72.¹ However, if you work past that age and are still participating in your employer’s 401(k) plan, you can delay your first distribution from that plan until April 1 following the year of your retirement. (You also must own no more than 5% of the company.)
  • If your distribution includes Roth 401(k) contributions and earnings, you can roll those amounts over to either a Roth IRA or your new employer’s Roth 401(k) plan (if it accepts rollovers). If you roll the funds over to a Roth IRA, the Roth IRA holding period will determine when you can begin receiving tax-free qualified distributions from the IRA. So if you’re establishing a Roth IRA for the first time, your Roth 401(k) dollars will be subject to a brand new five-year holding period. On the other hand, if you roll the dollars over to your new employer’s Roth 401(k) plan, your existing five-year holding period will carry over to the new plan. This may enable you to receive tax-free qualified distributions sooner.

When evaluating whether to initiate a rollover always be sure to (1) ask about possible surrender charges that may be imposed by your employer plan, or new surrender charges that your IRA may impose, (2) compare investment fees and expenses charged by your IRA (and investment funds) with those charged by your employer plan (if any), and (3) understand any accumulated rights or guarantees that you may be giving up by transferring funds out of your employer plan. 

What about outstanding plan loans?

In general, if you have an outstanding plan loan, you’ll need to pay it back, or the outstanding balance will be taxed as if it had been distributed to you in cash. If you can’t pay the loan back before you leave, you’ll still have 60 days to roll over the amount that’s been treated as a distribution to your IRA. Of course, you’ll need to come up with the dollars from other sources.

¹If you reached age 72 before July 1, 2021, you will need to take an RMD by December 31, 2021.

© Broadridge, Inc. – article posted with permission.

Other Recent Articles

Traced Act Offers Consumers Additional Protections Against Robocalls

Whether at home, work or on a cell phone, it's a scenario many Americans have found themselves in: answering a phone call only to find out it's from an unwanted robocaller. In fact, the number of unwanted robocalls in this country has skyrocketed in recent years. The Federal Communications Commission (FCC) ranks unwanted robocalls highest on their list of consumer complaints.

IRS Increases Standard Mileage Rates for Last Half of 2022

Due to recent increases in the price of fuel, the IRS has increased the optional standard mileage rates for computing the deductible costs of operating an automobile for business, medical, and moving expense purposes for the second half of 2022. The standard mileage rate for computing the deductible costs of operating an automobile for charitable purposes is set by statute and remains unchanged. For July 1, 2022, to December 31, 2022, the standard mileage rates are as follows
man and woman looking at social secuity paperwork

Social Security’s Uncertain Future: What You Should Know

Social Security is a pay-as-you go system, which means today's workers are paying taxes for the benefits received by today's retirees. However, demographic trends such as lower birth rates, higher retirement rates, and longer life spans are causing long-run fiscal challenges. There are simply not enough U.S. workers to support the growing number of beneficiaries. Social Security is not in danger of collapsing, but the clock is ticking on the program's ability to pay full benefits.

Other Articles Related to: ,

Investment Success Is Long-Term Investing

Time is usually the number one contributor to financial success when it comes to investing. Over the short-term, it is nearly impossible to predict whether the financial markets or world economies will go up, down, or even sideways. Historically, indices have gone up more often, especially over rolling periods of time.

Required Distributions: Changes You Need To Know

The Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 changed the rules for taking distributions from retirement accounts inherited after 2019. The so-called 10- year rule generally requires inherited accounts to be emptied within 10 years of the original owner's death, with some exceptions. Where an exception applies, the entire account must generally be emptied within 10 years of the beneficiary's death, or within 10 years after a minor child, beneficiary reaches age 21. This reduces the ability of most beneficiaries to spread out, or "stretch," distributions from an inherited defined contribution plan or an IRA

Investing In Stocks

Businesses sell shares of stock to investors as a way to raise money to finance expansion, pay off debt, and provide operating capital. Each share of stock represents a proportional share of ownership in the company. As a stockholder, you share in a portion of any profits and growth of the company. Dividends from earnings are paid to shareholders, and growth is realized by the increase in value of the stock. Stock ownership also generally gives you the right to vote on management issues.