Wait! Don’t leave your job without your retirement account
Cash Flow and Retirement
When you leave a job, voluntarily or due to a layoff, you’re likely to have a lot on your mind. It’s all too easy to set aside decisions about your employer-sponsored retirement plan account for another day. But it’s usually important to act quickly. Whether you have a 401(k), 403(b) or 457(a) plan, here are your basic options when you leave a job.
Maintain the status quo
If your plan with your previous employer has a balance of at least $5,000, the plan must allow you the option to leave your money there. This is the simplest course of action in the short term, but not necessarily in the long term. Your ex-employer may restrict your ability to make changes to your portfolio, take distributions or update beneficiaries. As a nonactive participant, you may also incur higher fees and receive less-effective communications about plan changes than active employees do.
However, you may want to consult with your financial advisor before liquidating your holdings if your previous employer offers a hard-to-duplicate investment option. This might include a high-yielding guaranteed investment contract or a stable value option.
Roll it into your new plan
Rolling over your savings into your new employer’s plan can help you avoid potential downsides of staying with the old plan or trying to keep track of multiple plans. But before you take this step, review the investment options available in your new employer’s plan.
Also be aware of any fees or charges you may incur when rolling your old plan balance into your new employer’s plan. If there are fees, you might want to keep your existing savings in the old plan or roll your account balance into an IRA while contributing to your new employer’s plan.
If, on the other hand, a rollover into your new employer’s plan seems like the better option, confirm that the plan accepts rollovers. Assuming that’s the case, request a direct “trustee-to-trustee” rollover. Otherwise, your old employer will mail a distribution check to you, minus a mandatory 20% tax withholding. You then have just 60 days to deposit these funds in your new plan. You also must cover the 20% that was withheld for taxes with other funds to achieve a 100% rollover.
Finally, if you fail to meet this 60-day deadline, or if you don’t have the cash available to cover the taxes that were withheld, you must pay income tax on the amount that wasn’t rolled over. And if you’re under age 59½, you may incur a 10% early withdrawal penalty.
Transfer to an IRA
Transferring your retirement savings into an IRA offers several advantages. For one thing, an IRA typically provides a much wider array of investment options than most 401(k) plans do.
Most financial services companies will accept a direct transfer of your retirement savings, which can streamline the process and avoid potentially costly mistakes. In some cases, your assets can be transferred “in kind,” meaning you don’t need to sell certain investments to hold them in your IRA. Be aware, however, that you may be charged an annual fee after rolling your savings into an IRA.
Unless you need the money to pay bills, consider the tax consequences before cashing out your retirement savings. Any distributions you take will be taxed as ordinary income, and, if you are under age 59½, you may have to pay an additional 10% penalty on any withdrawals.
There are exceptions to the penalties — for example, in cases of economic hardship or if you separate from service at age 55 or older. But even if you qualify for an exception, you’ll owe ordinary income tax on the distribution.
When deciding what to do with your retirement account, remember this: Future financial security is Job One. Don’t let job-switching activities distract you from protecting your nest egg.
Securities and investment advisory services offered through qualified registered representatives of MML Investors Services, LLC,90 Park Ave. 17th Floor, New York, NY 10016, 212.536.6000. The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Lenox Advisor, Inc., its employees, or representatives are not authorized to give legal or tax advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal tax or legal counsel. CRN202203-261116