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Whether you choose to quit your job or not, don’t forget your 401(k) plan.
As workers continue to quit their jobs at an increased rate and some companies are making layoffs — including Amazon, Salesforce, and Goldman Sachs — there’s a good chance some departing workers will leave an employer-funded retirement plan in their wake.
While not everyone has a 401(k) or similar company pension plan, those who do may want to know what happens to their account when they quit a job, and what options exist — and which don’t.
You have three basic options for an old 401(k)
Broadly speaking, you have several options for your old 401(k). Maybe you can Leave it where it is, roll it into your new workplace plan or an individual retirement account, or cash it out — although experts generally caution against the third step.
Cashing out “is the least desirable option,” said Eric Amzalag, a board-certified financial planner and owner of Peak Financial Planning in Canoga Park, California.
For starters, he said, you’d have to pay tax on the distribution — unless it’s post-tax money that you put into a Roth 401(k). With some exceptions, you also usually pay a 10% tax penalty if you are under the age of 59½. At that point, withdrawals from 401(k)s and other retirement accounts can begin.
“If the account size is large, this could put the person in a high tax bracket, which would result in the funds being taxed at a higher and disadvantageous rate,” Amzalag said.
Track the money left on a former employer’s 401(k).
Perhaps the easiest thing to do is to keep your retirement savings in your ex-employer’s plan, if permitted. Of course, you can no longer contribute to the plan. You also cannot borrow from this account like you can if you are an active 401(k) contributor.
Although this might be the easiest immediate choice if it’s available, it could lead to more work in the future.
In general, it can be difficult to find old 401(k) accounts if you lose track of them. during congress Known as Secure 2.0, the law, enacted in December, includes a provision for a lost and found retirement account that the Labor Department has two years to create. Some major 401(k) plan administrators — Fidelity Investments, Vanguard Group, and Alight Solutions — have also teamed up to offer their own lost-and-found.
Also note that if your account is small enough, you may not be able to keep it with your former employer even if you want to.
If the balance is between $1,000 and $5,000, your former employer may transfer the amount to an IRA. (Secure 2.0 changed this cap to $7,000, effective for distributions after 2023.)
If the balance is less than $1,000, the plan can cash you out — which can result in a tax bill and a prepayment penalty.
Consider switching to a new workplace plan or IRA
Another option is to transfer the balance to another qualifying retirement plan, such as a retirement plan. B. The 401(k) at your new employer, if the plan allows it.
“The primary benefit of this option is the consolidation of your accounts and less hassle to keep track of,” said CFP Justin Rucci, an advisor at Warren Street Wealth Advisors in Tustin, California.
You could also transfer it to an IRA, which might offer more investment opportunities — but There may also be higher fees that can eat up your nest egg.
Note that a Roth 401(k) can only be transferred to another Roth account. This type of 401(k) and IRA includes post-tax contributions, meaning you don’t get an upfront tax break like you do with traditional 401(k) plans and IRAs.
However, the Roth money grows tax-free and untaxed if you later make qualifying withdrawals.
Beware of 401(k) “Exit Costs”
No matter what you do with your old company retirement account, be aware of some of the potential “exit costs” involved.
For example, while any money you put into your 401(k) is always yours, the same cannot be said of employer contributions.
Vesting schedules – the length of time you must stay with a company to own 100% of the associated contributions – range from immediately to six years. Any amounts not carried over are generally forfeited when you leave your company.
Even if you took out a loan from your 401(k) and didn’t pay it back when you leave your company, there’s a good chance your plan will ask you to pay off the balance fairly quickly. Otherwise, your account balance will be reduced by the amount owed – known as a “loan settlement” – and treated as a distribution.
Simply put, unless you are able to come up with that amount and put it into a qualifying retirement account by the following year’s tax return deadline, that will be considered a distribution that may be taxable. And if you leave the job under the age of 59½, you can pay a 10% prepayment penalty.
According to Vanguard, about a third of employer plans allow former employees to continue paying the loan after they leave the company. Because of this, it’s worth checking your plan’s policies.
There may be reasons to avoid an IRA rollover
It’s worth speaking to a financial advisor before moving your old 401(k). In addition to portfolio considerations such as investment decisions and Fees, there may be planning consequences.
For example, there’s what’s called the Rule of 55: If you quit your job on or after the year you turn 55, you can receive dividends from your current 401(k) with no penalty. Generally, when you move the money to an IRA, you lose the ability to tap the money before the age of 59½ without paying a penalty.
If you are the spouse of someone planning to transfer their 401(k) balance to an IRA, you should be aware that you would lose the right to be the sole heir to that money. With the workplace plan, you, the spouse, must be the beneficiary unless you sign a waiver allowing it to be someone else.
Once the money goes into the rollover IRA, the account holder can name anyone as a beneficiary without the consent of their spouse.
https://www.cnbc.com/2023/01/17/dont-forget-about-your-old-401k-if-you-quit-a-job-or-are-laid-off.html Don’t forget your old 401(k) when you quit a job or get fired