Getting 401k After Leaving Job – When you get a new job, there’s a lot to think about. A new office, a new colleague, a new title—maybe even a new company car or a new wardrobe to reflect your new position. In the excitement of changing jobs, it’s easy to get lost on important considerations on the move, like what to do with the money in your existing 401(k) account. When you leave your job for a new job, you can keep your 401(k) contributions, but you’ll need to figure out what to do with them. By understanding your options, you can reduce or avoid paying taxes, maximize your savings, and help ensure your nest egg continues to grow.
What happens to your 401(k) balance when you leave your job? This partly depends on how much money you have in your account. Regardless of the amount, you will keep all contributions you make to the plan, plus the matching portion your employer has awarded.
Getting 401k After Leaving Job
The money withdrawn from the 401(k) is called a distribution. Plan administrators are required by law to provide you with a written explanation of your distribution options, including the ability to transfer money directly to another 401(k) plan or to an individual retirement account (IRA) farm.
Do Not Drain Your 401(k), Or Let A Former Employer Do It
In most cases, you can also leave your 401(k) money in your former employer’s plan. However, if your plan balance is $1,000 to $5,000, the plan administrator can deposit the money into the IRA for you if you don’t cash it out or transfer it to another retirement account. If your balance is less than $1,000, your plan administrator can pay it automatically and send you a check. In this case, a lot of taxes will be deducted. To prevent your plan administrator from making decisions for you, contact them as soon as you know you’ll be out of work to explore your options.
If your former employer cashed your 401(k) account and gave you a check, you must put the money into a qualifying retirement account within 60 days to avoid paying taxes on it. If you don’t get a check, and you can park your 401(k) at your previous employer, take some time to consider your options.
As long as your 401(k) balance is $5,000 or more, you can put the money aside in your old employer’s plan. It might make sense to do this in a relatively short amount of time. For example, if you’ve been laid off and don’t have a new job yet, you may want to leave your existing 401(k) until you find a new job that offers a 401(k), then rollover (more on that in a moment).
Technically, your 401(k) money can stay in your old employer’s plan as long as you want, but there are some good reasons not to leave it indefinitely. For one thing, if you start contributing to a 401(k) plan through your new employer and leave your existing plan intact, you’ll be paying fees on two accounts. These costs can add up quickly, eating into your investment income. In addition, if your focus is divided between two accounts, you may not be as diligent about monitoring your accounts and rebalancing your investments as if you were concentrating on one plan with your current employer. Another danger: Your former employer may go out of business. If this happens, your 401(k) balance is still safe, but accessing the account or rolling over funds can be more complicated.
Can I Withdraw Money From My 401(k) Before I Retire?
If you receive a distribution from one qualifying retirement plan and contribute all or part of it to another qualifying retirement plan within 60 days, it is considered a rollover, and the transaction is tax-free. When you leave your job, your plan administrator will provide a written explanation of your rollover options.
Unless your former employer cashed your 401(k) and gave you a check, you don’t need to complete a rollover right away. In fact, it’s often wise to wait until your probationary period at a new job is over and you’re sure you’ll be with this employer for a while. You should also make sure that you are satisfied with the investment options offered by your new employer’s 401(k) plan. If not, rolling your existing account into an IRA may be a better move.
Unlike a 401(k), which is sponsored by an employer, you can open an IRA on your own. You can choose from a traditional IRA or a Roth IRA, both of which give you many investment options — a plus if you feel your 401(k) options are too limited. For 2020, the annual contribution limit for both types of IRAs is $6,000 ($7,000 if you are 50 years of age or older).
Roth IRAs are limited to people under a certain income level, and the contributions you make to them are not tax-deductible; however, money withdrawn in retirement is tax-free. With a traditional IRA, contributions are tax-deductible depending on your income and whether or not you have another retirement plan, but you are taxed on any withdrawals you make in retirement.
Roll Over Or Not? Smart 401(k) Moves When You Quit Your Job
Whether you switch to a 401(k), a traditional IRA, or a Roth IRA, be sure to flow money directly from one retirement account to another to avoid taxes. If your plan administrator writes a check with your name on it, the distribution is automatically subject to a 20% withholding tax, even if you intend to roll the money over later.
Of course, you can cash out your entire 401(k) balance when you leave your job — but doing so is rarely a good idea. First, 20% of the distribution will be deducted for taxes. Second, if you are under 59½, you will be subject to an additional 10% tax penalty for withdrawing your money early. (The Rule of 55, which allows you to withdraw your 401(k) funds without penalty if you leave your job at age 55 or older, is the only exception.)
But sacrificing a large portion of your 401(k) balance to the IRS still isn’t the worst thing. By cashing out your 401(k), you’re getting rid of all the compound interest you’ve earned through years of saving. Even if you start a new retirement account later, you will never make up for lost time. Unless you have some other investment account that you can use for retirement, you will be restarting your retirement savings.
In the rush to start a new job, it’s easy to lose sight of your 401(k), but neglecting this investment account can have long-term repercussions on your finances. To maximize your retirement savings, carefully weigh the pros and cons of each option for managing your 401(k). And don’t make a move until you fully understand all the alternatives and how your decision may affect your tax liability and financial future.
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