Changing Employment-Your 401(k) Options
It is important to understand your 401(k) options when you are changing employment. If you lost your job or got a different one there are certain things you need to be aware of. In this article, we will go over your options and your employee’s rights regarding your 401(k).
Your Employee Rights
Whatever the reason for your change in employment, it is important that you understand your rights regarding the balance of your 401(k). You are always entitled to receive your contributions and typically any investment earnings your contributions received.
Employer contributions can be a little more complex. Generally, you do not gain ownership of those amounts outright, they are gradually given to you through a process known as vesting. The vesting process is outlined in the vesting schedule. You can find this in your Summary Plan Description (SPD) or by talking with your plan administrator. It is important that you understand your vesting schedule because you forfeit any unvested contributions when you leave. If this amount is substantial you may find slightly delaying your departure to be in your best interest.
New Employer’s 401(k) vs. Rollover IRA
You have two options when it comes to moving your 401(k) funds. It is important to understand your 401(k) options. You can either transfer the money to your new employer’s 401(k) or you can roll it over into an IRA. It is important that you have professional help with this decision since it can have significant consequences on your retirement planning. To help you make your decision we will highlight some of the main differences between the choices.
Advantages of a Rollover IRA
- More Investment Choices. IRA’s offer almost unlimited investment choices, whereas a 401(k) will offer you only a small handful of choices.
- Timing of Distributions. With an IRA, the timing of your distributions is pretty much at your discretion. However, this does not include Required Minimum Distributions. But these do not have to be taken until you are 70 ½.
- Roth Conversion. If you wish, you can convert your IRA into a Roth IRA. You will have to pay taxes to convert the pre-tax balance, but when times comes to take distributions you will not have to pay taxes on your cost basis or any of your earning. Please note that a Roth conversion is a big decision with large consequences and should only be done after consulting with your financial advisor.
Advantages of Your New Employer’s 401(k)
- Loan Provisions. 401(k)s allow you to take loans on your account. Some allow you to take a loan up to 50% of your account. You can do this without paying taxes or penalties on the money. However, if you take out a loan and decide to roll your account over you will need to pay back the loan before you transfer or you will have to pay taxes on that money.
- Creditor Protection. 401(k)s have unlimited federal protection from creditors. IRAs are only protected if you declare bankruptcy.
- Postpone RMDs. If you are still working and contributing to your 401(k) at 70 ½ you can delay your Required Minimum Distributions. Your RMD can be delayed until April 1st of the year following the year you retire.
Meet with a Qualified Financial Professional
Before you make any type of investment decision it is important that you meet with a qualified financial professional. When you meet with your financial advisor you should talk to them about the following things:
- Ask about possible surrender charges imposed by your employer’s plan or any surrender charges your IRA may impose.
- Compare investment fees and expenses between an IRA and 401(k). A quality financial planner can provide you with a chart showing the impact the different fees will have on your account.
- Make sure you understand any accumulated rights or guarantees you may be giving up if you transfer out of your employer plan.
Your financial planner can help you understand your 401(k) options thoroughly. Do not leave your retirement planning up in the air, make sure you are prepared.
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