Are you going to a new job? Do not forget about your 401 (k) plan.


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When you get a new job, there may be many things you want to completely forget about your ex-employer.

Just make sure your 401 (k) plan is not one of them.

While you may have options on how to handle those retirement savings, there are situations when the decision is made for you if you do not take action – and it may not be in your best interest.

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“It’s better to take care of that in the first two months of that transition to a new job,” said Haley Tolitsky, a certified financial planner at Cooke Capital in Wilmington, North Carolina.

As part of the so-called Great Resignation, workers have left their jobs at near record levels in search of the best opportunities in a tight job market. With the unemployment rate at 3.6%, companies have had to compete for talent either by raising wages or expanding their employment group.

According to the latest data from the US Department of Labor, nearly 4.4 million Americans quit their jobs in February. This is about 100,000 more than in January and close to the record of 4.5 million set in November.

While not everyone has a 401 (k) or similar retirement plan in the workplace, those who do should know what happens to their account when they leave work and what the options are – and they are not.

Here’s what you need to know.

Leave the money or move?

One thing you can do is leave your retirement savings in your ex-employer’s plan, if allowed. Of course, you can no longer contribute to the plan or receive any employer contribution.

However, while this may be the easiest immediate solution if available, it may lead to more work in the future.

Basically, finding old 401 (k) accounts can be tricky if you lose track of them. There is, incidentally, a pending legislation in Congress that would create a “lost and found” database to make it easier to find lost accounts.

If you can avoid it, you do not want to collect your 401 (k).

Kathryn Hauer

Certified financial planner with investment advisors Wilson David

“It’s really common,” Tolitsky said. “People move to a new job, they have changes in life, they forget it and then 10 years later they are not even sure who [the 401(k)] was with or with whom the provider was. “

Also keep in mind that if your balance is low enough, the plan may not allow you to stay on it even if you want to. If the balance is less than $ 1,000, your plan can cash in on you – which can lead to a tax bill and a fine.

“If you can avoid it, you do not want to cash in on your 401 (k),” said Kathryn Hauer, a CFP with Wilson David Investment Advisers in Aiken, South Carolina. “Doing this with a traditional 401 (k) means you will probably pay a 10% tax penalty.

Your other option is to transfer the balance to another qualified retirement plan. This could include a 401 (k) on your new employer – assuming the plan allows it – or an individual retirement account.

Note that if you have a Roth 401 (k), it can only be transferred to another Roth account. This type of 401 (k) and IRA includes post-tax contributions, which means you do not receive a tax break in advance as you do with traditional 401 (k) and IRA plans.

However, Roth’s money grows tax-free and is tax-free when you make qualified withdrawals along the way.

Also, while any money you put into 401 (k) is always yours, the same cannot be said for employer contributions.

Dress schedules – the length of time you have to stay in a company for its respective contributions to be 100% yours – range from immediately to six years. Any undressed amount is generally confiscated when you leave your company.

Outstanding loans

Among the 401 (k) plans that allow participants to borrow, about 13% of savers had a loan in their 2020 account with an average of $ 10,400 in debt, according to Vanguard research.

If you quit your job and have not repaid those borrowed funds, chances are your plan will require you to repay the remaining balance fairly quickly; otherwise, your account balance will be reduced by the amount you owe and will be considered a distribution.

Simply put, if you are unable to find that amount and place it in a qualifying retirement account, it is considered a distribution that may be taxable. And, if you are under the age of 55 when you leave work, you will pay a 10% fine for early withdrawal. Employees who leave their company when they reach that age are subject to special withdrawal rules for plans 401 (k) – more on that below.

If it is initially considered a disbursement, you have until next year’s Tax Day to replace the loan amount – i.e., if you were to leave in 2022, you have until April 15, 2023, to receive the funds ( or Oct. 15, 2023, if you submit an addendum). Prior to the major tax law changes that took effect in 2018, participants had only 60 days.

About a third of employer plans allow ex-employees to continue repaying the loan after leaving the company, according to Vanguard. This makes it worthwhile to check the policy of your plan.

Reasons to stop

There is something called Rule 55: If you quit your job within or after the year you turn 55, you can get a penalty-free delivery from your current 401 (k).

If you transfer money to an IRA, you generally lose the ability to use the money before the age of 59 without paying a fine.

Furthermore, if you are the spouse of someone who plans to spend his or her 401 (k) balance on an IRA, keep in mind that you will lose the right to be the sole heir of that money. With the work plan, the beneficiary should be you, the spouse, unless you sign a waiver that allows him to be someone else.

Once the money is deposited in the IRA rollover, the account holder can appoint anyone a beneficiary without the consent of their spouse.

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